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Guide to Business Strategic Planning

Leveraging the TCFD RecommendationsPractical Guide to Scenario Analysis in Disclosure of Climate-related Risks and Opportunities

March 2019

Ministry of the Environment, Government of Japan

Climate Change Policy Division

Contents

1. What is the TCFD Recommendations?

1-1. Summary of the TCFD Recommendations p.5

1-2. Requirements of the TCFD Recommendations and Meaning of Scenario Analysis p.11

2. Scenario Analysis - Practice Examples p.25

(i) ITOCHU Corporation p.31

(ii) Mitsui O.S.K. Lines, Ltd. p.39

(iii) Japan Airlines Co., Ltd. p.50

(iv) MITSUBISHI MOTORS CORPORATION p.56

(v) Sumitomo Forestry Co., Ltd. p.62

(vi) Tokyu Fudosan Holdings Corporation p.76

3. Publicly Available Scenario Analysis p.83

4. References on Degree of Risk Importance in Selected Sectors

(i) Energy p.105

(ii) Transportation(Maritime Transportation, Passenger Air Transportation,

Automobiles)p.119

(iii) Buildings / Forest Products p.146

[Objective of the Practical Guide]

Introduce “practical” examples, to which companies can refer when performing scenario

analysis aligned the TCFD Recommendations

While Japan’s companies are prepared to meet the requirements of the TCFD

recommendations, the process of scenario analysis itself is not well known among

them, and almost no case studies are available.

Issue

(Reference: Scenario analysis in the TCFD recommendations)

The TCFD recommendations is a set of requirements that the financial industry has sent out based upon the

Paris Agreement, calling on business management to make climate change efforts.

The TCFD recommendations call for climate-related financial reporting and business management focusing

on four core elements – i.e. governance, strategy, risk management, and metrics and targets.

For strategy, in particular, companies are recommended to perform scenario analysis for financial impacts

under multiple climate-change scenarios.

Scenario analysis helps companies develop robust strategies under a wider range of uncertain future

conditions.

Objective

of

the Guide

The Guide has compiled practice examples of the TCFD recommendations subject to

the support programs of the Ministry of Environment to help companies to some extent

perform scenario analysis on their own.

3

[Structure and Usage of the Practical Guide]

The Guide consists of “Content of the TCFD Recommendations”, “Steps in Scenario

Analysis”, “Practice Examples”, and “References”

Companies want to know what

the TCFD recommendations are,

and what kind of climate-related

financial disclosures are

recommended.

Companies want to know each

step of scenario analysis

performed by other Japanese

companies.

Companies want useful

references for risk importance

assessment in scenario analysis.

Chapter 1. Summary of the TCFD Recommendations

This chapter explains why the TCFD was established, what the TCFD

recommends, and what kind of climate-related disclosures are recommended.

Chapter 2. Scenario Analysis - Practice Examples (six companies)

This chapter presents scenario analysis performed by selected companies

under the support program of the Ministry of the Environment and explains

how to undertake scenario analysis.

Chapter 4. References on Degree of Risk Importance in Selected

Sectors

This chapter provides materials for scenario analysis, part of which were

used for assessment of the degree of risk importance under the Ministry’s

support program.

Corporate needs Chapters of the Practical Guide and Their Summaries

4

Companies want to see how to

perform scenario analysis for

climate-related disclosures

Chapter 3. Publicly Available Scenario Analysis

This chapter presents corporate efforts for scenario analysis in accordance

with the steps recommended by the TCFD.

The Practical Guide provides the method for TCFD scenario analysis created on its own methodology and interpretation of the “TCFD’s Technical

Supplement: The Use of Scenario Analysis in Disclosure of Climate-Related Risks and Opportunities” (July 2017).

Facts and figures in the case studies are as of the time of acquisition.

1. What are the TCFD recommendations?

1-1. Summary of the TCFD recommendations

1-2. Requirements of the TCFD recommendations

and meaning of scenario analysis


This chapter explains why the TCFD was established and what the TCFD recommends,

and what kind of climate-related disclosures are recommended.

5

There are three broad channels through which climate change can affect financial

stability:

Physical risks: The direct impacts on property from climate-related events, such as

floods and storms and indirect impacts on blocked global supply chain or depletion of

resources;

Liability risks: The impacts that could arise if parties who have suffered loss or

damage from the effects of climate change seek compensation from those they hold

responsible;

Transition risks: The risks which could result from reassessment of the value of a

large range of assets with a large volume of greenhouse gas emissions during

the process of adjustment towards a lower-carbon economy .

Speech by Mark Carney, Chair of the Financial Stability Board (FSB),

Governor of the Bank of England (September 2015)

“The financial risks that could result from the process of adjustment towards a lower-carbon economy could

prompt a reassessment of the value of a large range of assets with a large volume of greenhouse gas

emissions and destabilize the financial system.” Speech made by Mark Carney, Chair of the Financial

Stability Board (FSB), Governor of the Bank of England

Dr. Carney also refers to the possibility that a sudden reassessment could destabilize markets like the

subprime loan crises.

[Background of the TCFD ]

Climate change risks could destabilize the financial system and become a

possible threat to financial institutions

Source: Financial Times Online, September 30, 2015

6

[What are the TCFD recommendations?]

The TCFD recommendations are financial disclosure framework focusing on climate-

related information

G R I

For multi-

stakeholders

ESG information

I I R C

For investors

ESG information

T C F D

Climate-related

information

For investors

Focusing on climate-related information for investors

The TCFD final report sets out a framework to disclose climate-related financial information for

investors.

The TCFD recommends that businesses disclose the potential impacts of climate change on their

organizations.

7

[Climate Change and Corporate Management]

Climate change can present clear risks and opportunities for business management

Management

Environment

/ CSR

Business

Finance

Business management

Risks (opportunities) increase

Corporate brand image

Credit-rating agencies

Investor-analyst dialogue

Non-financial reporting

disclosures

Business sustainability

Business common sense

and intelligence

Corporate value

Changes in modalities of

competition

Boycott and exclusion

from market

Climate change requires

reporting on not just the

environment and CSR

but all matters.

8

The TCFD recommendations serve as a tool for dialogue with investors, helping

enterprises recognize climate-related risks and opportunities, and planning business

strategies incorporating such risks and opportunities.

[Acceptance of the TCFD recommendations]

The TCFD is a Europe-led initiative, supported by an increasing number of Japanese

companies

(As of March 14, 2019), 537 financial and non-financial enterprises in 48 countries and 65 governments,

international organizations, and industry organizations announced their support of the TCFD recommendations.

The Ministry of the Environment announced July 27, 2018 that it agreed to adopt the TCFD recommendations.

These supporters include financial firms responsible for assets of nearly $100 trillion, as of September 2018,

and the figure is still increasing (according to the 2018 status report).

List of Japanese companies and other organizations supporting the TCFD recommendations

(as of March 14, 2019)

9

* A fund operated by Sophia School Corporation (https://www.sophia.ac.jp/jpn/news/PR/2018/20190218tcfd.html)

Source: website of the TCFD

Financial

(22)

MS&AD Insurance Group Holdings, Inc. / Rating and Investment Information, Inc. / THE SHIGA BANK, LTD. /

Sophia University Endowment* / SOMPO Holdings, Inc. / Dai-ichi Life Holdings, Inc. / Daiwa Securities Group / Tokio

Marine / Nikko Asset Management / Nissay Asset Management Corporation / Development Bank of Japan / Nippon

Life Insurance Company / Japan Exchange Group Inc. / Government Pension Investment Fund (GPIF) / Nomura

Holdings, Inc. / Mizuho Financial Group / Sumitomo Mitsui Trust Asset Management Co., Ltd. / Sumitomo Mitsui

Trust Holdings, Inc. / Sumitomo Mitsui Financial Group / Mitsubishi UFJ Financial Group, Inc. / Meiji Yasuda Life

Insurance Company / Resona Holdings, Inc.

Non-

Financial

(32)

E-Square Inc. / NEC Corporation / OMRON Corporation / Kao Corporation / Kawasaki Kisen Kaisha, Ltd. / Kirin

Holdings Company, Limited. / Kokusai Kogyo Co., Ltd. / Konica Minolta, Inc. / CSR Design Green Investment

Advisory, Co., Ltd. / JTEKT CORPORATION / Mitsui O.S.K. Lines, Ltd. / Sumitomo Chemical / Sumitomo Forestry

Co., Ltd. / SEKISUI CHEMICAL CO., LTD. / Sekisui House, Ltd. / Sojitz Corporation / Daiwa House Industry Co., Ltd.

/ Teijin Group / Nikon Corporation / NYKLine / Neural / Nomura Research Institute, Ltd. / Hitachi, Ltd. / FUJIFILM

Holdings Corporation / MARUI GROUP CO.,LTD. / Mitsui Chemicals, Inc. / Mitsui & Co., Ltd. / Mitsubishi Chemical

Holdings Corporation / Mitsubishi Heavy Industries, Ltd. / Mitsubishi Corporation / Yokogawa Electric Corporation /

Ricoh Company, Ltd.

Other

(8)

Ministry of Environment (MOE) / Financial Services Agency (FSA) / Ministry of Economy, Trade and Industry (METI)

/ Japanese Bankers Association / The Investment Trusts Association, Japan (JITA) / Japanese Institute of Certified

Public Accountants (JICPA) / Japan Securities Dealers Association / Japan Investment Advisers Association (JIAA)

10

[Objectives of the TCFD recommendations and Widespread Adoption]

The TCFD recommendations expect companies to gradually adopt the recommendations. A

growing number of countries are putting them into their official frameworks

Broad understanding of the concentration

of carbon-related assets in the financial

system and the financial system’s exposure

to climate-related risks

Final TCFD Report

Released (July

2017) Companies already reporting under other

frameworks implement the Task Force’s

recommendations

Climate-related issues viewed

as mainstream business and

investment considerations by

both users and preparers

More complete, consistent,

and comparable information

for market participants,

increased transparency, and

appropriate pricing of

climate-related risks and

opportunities

Five Year Time Frame

Ad

op

tio

n V

olu

me

Organizations begin to

disclose in financial filings

Greater adaptation, further development

of information provided (e.g., metrics and

scenario analysis), and greater maturity

in using information

(Resources) Task Force on Climate-related Financial Disclosures, 2017 Sources: TCFD, “2018 Status Report”, websites of the Ministry of Environment of Japan, the

European Commission, and other governmental organizations, and publicly available information

Objectives of the TCFD Government Support

The central bank requests companies to support the TCFD

recommendations

• A working group on climate risks was established by the central bank, requesting

companies to support the recommendations (Apr 2018).

Netherlands

UK requests its regulators to support the TF

recommendations

• The UK Green Finance Taskforce, established by the government to transition to

a low-carbon economy.

• Recommends that relevant financial regulators should support TCFD

recommendations (Mar 2018).

United Kingdom

EU to revise its directive to comply with the TCFD

recommendations

• The European Commission held a stakeholder meeting to revise the guidelines of

the Non-Financial Reporting Directive (by 2Q 2019). It will publish the final report

within 2018.

EU

Canada considers institutionalizing the TCFD

recommendations

• The Minister of Environment and Climate Change and the Minister of Finance

launched an Expert Panel on Sustainable Finance, which discussed and

published an interim report on institutionalization of the recommendations (Oct

2018).

Canada

China to revise the guidelines for environment reporting

• The government established a pilot project jointly with the UK government,

examining the possibility of incorporating the TCFD recommendations in its

guidelines for environmental reporting (Jan 2018)

China

France to make the TCFD recommendation mandatory

• Secretary of State Brune Poirson stated that the government would push for the

recommendations to be made mandatory (Jun 2017).

France

Govern

ment support

to inte

gra

te the r

ecom

mendations in

off

icia

l fr

am

ew

ork


The chapter explains why the TCFD was established and what the TCFD recommends,

and what kind of climate-related disclosures are recommended.

11

1. What are the TCFD recommendations?

1-1. Summary of the TCFD recommendations

1-2. Requirements of the TCFD recommendations

and meaning of scenario analysis

[Requirements of the TCFD Recommendations]

The TCFD recommends disclosure of information related to climate change that poses

financial risks and opportunities

Climate-related

risks

Climate-related

opportunities

Understanding financial impact

Incorporating them in business

strategies and risk management

Disclosing information in financial

reporting

The TCFD recommendations request all companies to (i) use different climate-related scenarios,

including a 2C or lower scenario to (ii) assess their climate-related risks and opportunities, (iii)

incorporate such risks and opportunities in their business strategies and risk management, and (iv)

understand and disclose their financial impacts.

Sources: prepared by the Ministry of Environment based on the page 9 of Financial Services Agency’s document, “On Reports of the Task Force on Climate-

related Financial Disclosures (TCFD)” for briefings on “Final Report - Recommendations of the Task Force on Climate-related Financial Disclosures” of

the Financial Stability Board (FSB)12

[Financial Impact]

The TCFD recommendations present the scope of climate-related risks and opportunities,

and financial impacts to be disclosed

RevenuesIncome

StatementBalance Sheet

Assets &

LiabilitiesCapital &

Financing

Cash Flow

Statement

Transition Risks

Physical Risks

Policy and Legal

Technology

Market

Reputation

Acute

Chronic

Opportunities

Resource Efficiency

Energy Source

Products / Services

Markets

Resilience

Expenditures

Climate-Related Risks, Opportunities, and Financial Impacts

Source: prepared by the Ministry of Environment based on the Task Force on Climate-related Financial Disclosures, “Final Report - Recommendations of the Task Force on

Climate-related Financial Disclosures”, 2017. p.8

Risks Opportunities

Financial Impact

Strategic Planning

Risk Management

Financial Impact

13

Category

Risks related to the

transition to a lower-

carbon economy

Risks related to the

physical impacts of

climate change

Transition

Risks

Physical

Risks

Enhancing regulations on GHG emissions, imposing

greater obligations on information disclosure

Replacing existing products with those based on low-

carbon technologies, investing in new technologies

that eventually turn out to be a failure

Changes in consumer behaviors, market signals with

greater uncertainty, a rise in materials and costs

Changes in customer or community perceptions,

criticism against certain industries, increased concern

among stakeholders

Event-driven risks, including severity of extreme

events such as cyclones or floods

Longer-term shifts in climate patterns, including

sustained higher temperatures, which may cause sea

level rise or chronic heat waves

Definition Major aspects and policy actionsType

Policy and

Legal

Technology

Market

Reputation

Acute

Chronic

14

[Climate-related Risks]

The TCFD Recommendations divided climate-related risks into two major categories: (1) risks

related to the transition to a lower-carbon economy and (2) risks related to the physical impacts of

climate change



[Climate-related Opportunities]

The TCFD recommendations identified the following five areas of climate-related opportunities

that organizations can produce in the course of their efforts to mitigate and adapt to climate

change

Area Policy actions Financial impact

Opportunities

Use of more efficient models of transport

Use of more efficient production and

distribution processes

Use of Recycling

Move to more efficient buildings

Reduced water usage and consumption

Resource

Efficiency

Energy

Source

Products

and

Services

Markets

Resilience

Use of lower-emission sources of energy

Use of supportive policy incentives

Use of new technologies

Participation in carbon market

Shift toward decentralized energy generation

Development and/or expansion of low

emission goods and services

Development of climate adaptation and

insurance risk solutions

Development of new products or services

through R&D and innovation

Ability to diversify business activities

Access to new markets

Use of public-sector incentives

Access to new assets and locations needing

insurance coverage

Participation in renewable energy programs

and adaptation of energy-efficiency measures

Resource substitutes/diversification

Reduced operating costs (e.g., through efficiency gains and cost

reductions)

Increased production capacity, resulting in increased revenues

Increased value of fixed assets (e.g., highly rated energy-efficient

buildings)

Benefits to workforce management and planning (e.g., improved health

and safety, employee satisfaction) resulting in lower costs

Reduced operational costs (e.g., through use of lowest cost abatement)

Reduced exposure to future fossil fuel price increases

Reduced exposure to GHG emissions and therefore less sensitivity to

changes in cost of carbon

Returns on investment in low-emissions technology

Increased capital availability (e.g., as more investors favor lower-

emissions producers)

Reputational benefits resulting in increased demand for goods/services

Increased revenue through demand for lower emissions products and

services

Increased revenue through new solutions to adaptation needs (e.g.,

insurance risk transfer products and services)

Better competitive position to reflect shifting consumer preferences,

resulting in increased revenues

Increased revenues through access to new and emerging markets (e.g.,

partnerships with governments, development banks)

Increased diversification of financial assets (e.g., green bonds and

infrastructure)

Increased market valuation through resilience planning

Increased reliability of supply chain and ability to operate under various

conditions

Increased revenue through new products and services



15

[Guidance for Specific Sectors]

The TCFD supplemental guidance provides additional context and suggestions for

implementing the recommended disclosures for four non-financial sectors (Energy; Materials

and Buildings; Transportation; and Agriculture, Food, and Forest Products) potentially most

affected by climate change

Energy

Oil and Gas

Coal

Electric Utilities

Assessment and potential impacts of legal compliance, operating costs,

changes in risks and opportunities; changes in regulations and shift in

consumer and investor preferences; and changes in investment

strategy

Transportation

Air Transport, Maritime

Transportation

Land Transportation (Rail

Transportation, Tracking

Services)

Automobiles

Assessment and potential impacts of financial risks of enhanced

regulations and new technology on existing factories and equipment;

R&D investment in new technologies; opportunities for use of new

technologies to lower emissions standards and regulations on higher

fuel efficiency

Materials and

Buildings

Metals and Mining

Chemicals

Construction Materials,

Capital Goods

Real Estate Management

and Development

Assessment and potential impacts of enhanced regulations on GHG

emissions and carbon pricing; risk assessment of increased severity of

extreme weather events on construction materials and property; and

opportunities for products to improve energy efficiency or reduce

energy consumption

Agriculture,

Food, and

Forest

Products

Beverages, Foods

Agriculture

Paper and Forest

Products

Assessment and potential impacts of GHG emissions reductions;

recycling and waste management; business of food and textile

products with lower GHG emissions, and shifts in consumer

preferences


Climate-related Financial Disclosures”, 2017. p.52-65

Sector Industry Recommended disclosure

16

[TCFD recommendations]

The TCFD recommendations are structured around four thematic areas: Governance,

strategy, risk management, and metrics and targets

Recommended

disclosuresガバナンス戦略リスク管理指標と目標

Areas in detail

Disclose the organization’s

governance around climate-

related risks and opportunities

Disclose the actual and

potential impacts of climate-


on the organization’s

businesses, strategy, and

financial planning where such

information is material

Disclose how the organization

identifies, assesses, and

manages climate-related risks

Disclose the metrics and

targets used to assess and

manage relevant climate-


where such information is

material

Recommended

Disclosures

a) Describe the board’s

oversight of climate-related

risks and opportunities

a) Describe the climate-


the organization has identified

over the short, medium, and

long term

a) Describe the organization’s

processes for identifying and

assessing climate-related

risks

a) Disclose the metrics used

by the organization to assess


opportunities in line with its

strategy and risk management

process

b) Describe management’s

role in assessing and

managing climate-related risks

and opportunities

b) Describe the impact of


opportunities on the

organization’s businesses,

strategy, and financial

planning

b) Describe the organization’s

processes for managing

climate-related risks

b) Disclose Scope 1, Scope 2,

and if appropriate, Scope 3

greenhouse gas (GHG)

emissions, and the related

risks

c) Describe the resilience of

the organization’s strategy,

taking into consideration

different climate-related

scenarios, including a 2C or

lower scenario

c) Describe how processes for

identifying, assessing, and

managing climate-related risks

are integrated into the

organization’s overall risk

management

c) Describe the targets used

by the organization to manage


opportunities, and

performance against targets

Risk

ManagementGovernance Strategy

Metrics and

Targets

17



The organization’s

governance

around climate-

related risks and

opportunities

[Governance = Involvement of Management]

To incorporate climate-related risks and opportunities in business strategy, an organization

should establish a system involving management. The TCFD recommendations require an

organization to describe the board’s oversight of climate-related risks and opportunities, and

management’s role in assessing and managing such risks and opportunities



The board’s oversight of climate-related risks and opportunities

Processes and frequency by which the board and/or board committees are informed

about climate-related issues

Whether the board and/or board committees consider climate-related issues when

reviewing and guiding strategy, major plans of action, risk management policies,

annual budgets, and business plans as setting the organization’s performance

objectives, monitoring implementation and performance, and overseeing major

capital expenditures, acquisitions, and divestitures

How the board monitors and oversees progress against goals and targets for

addressing climate-related issues

Management role in assessing and managing climate-related risks and

opportunities

Whether the organization has assigned climate-related responsibilities to

management-level positions or committees; and, if so, whether such management

positions or committees report to the board or a committee of the board and whether

those responsibilities include assessing and/or managing climate-related issues

A description of the associated organizational structure(s)

How management (through specific positions and/or management committees)

monitors climate-related issues

Impact on the

organization’s

businesses,

strategy, and

financial

planning (where

relevant

information is

critical)

The climate-related risks and opportunities the organization has identified over the

short, medium, and long term• A description of what they consider to be the relevant short, medium, and long-term time

horizons

• The specific climate-related issues for each time horizon that could have a material financial

impact on the organization

• The process(es) used to determine which risks and opportunities could have a material financial

impact on the organization

The impact of climate-related risks and opportunities on the organization’s

businesses, strategy, and financial planning• How identified climate-related issues have affected their businesses, strategy, and financial

planning

• The impact on their businesses and strategy in the areas of products and services; supply chain

and/or value chain; adaptation and mitigation activities; investment in research and

development; and operations

• The impact of climate-related issues on operating costs and revenues; capital expenditures and

capital allocation; acquisitions or divestments; and access to capital

The resilience of the organization’s strategy, taking into consideration different

climate-related scenarios, including a 2C or lower scenario• How resilient their strategies are to climate-related risks and opportunities

• Where they believe their strategies may be affected by climate-related risks and opportunities;

how their strategies might change to address such potential risks and opportunities; and the

climate-related scenarios and associated time horizon(s)



[Strategy]

The TCFD recommendations require an organization to describe the climate-related risks and

opportunities over the short, medium, and long term; their impacts on the organization’s

businesses, strategy, and financial planning; and the resilience of the organization’s strategy,

taking into consideration different climate-related scenarios, including a 2C or lower scenario

How the

organization

identifies,

assesses,

and manages

climate-

related risks

The Organization’s processes for identifying and assessing climate-related

risks• Their risk management processes for identifying and assessing climate-related risks

(An important aspect is how the organization determines the relative significance of

climate-related risks in relation to other risks)

• Whether they consider existing and emerging regulatory requirements related to climate

change

• Their processes for assessing the potential size and scope of identified climate-related

risks; and definitions of risk terminology used or references to existing risk classification

frameworks used

The organization’s processes for managing climate-related risks• Their processes for managing climate-related risks, (including how they make decisions

to mitigate, transfer, accept, or control those risks)

• Their processes for prioritizing climate-related risks, (including how materiality

determinations are made)

How processes for identifying, assessing, and managing climate-related risks

are integrated into the organization’s overall risks management

• How their processes for identifying, assessing, and managing climate-

related risks are integrated into their overall risk management

[Risk Management]

The TCFD recommendations require an organization to describe the organization’s processes

for identifying, assessing, and managing climate-related risks, as well as how these

processes are integrated into the organization’s overall risk management



20

The metrics used by the organization to assess climate-related risks and opportunities in

line with its strategy and risk management process• The key metrics used to measure and manage climate-related risks and opportunities (organizations

should consider including metrics associated with water, energy, land use, and waste management)

• Whether and how related performance metrics are incorporated into remuneration policies (where

climate-related issues are material)

• Their internal carbon prices as well as climate-related opportunity metrics such as revenue from

products and services designed for a lower-carbon economy

• Metrics should be provided for historical periods to allow for trend analysis. The methodologies used

to calculate or estimate metrics should also be included.

Scope 1, Scope 2, and if appropriate, Scope 3 greenhouse gas (GHG) emissions, and the

related risks• GHG emissions calculated in line with the GHG Protocol methodology to allow for aggregation and

comparability across organizations and jurisdictions

• Related, generally accepted industry-specific GHG efficiency ratios (as appropriate)

• GHG emissions and associated metrics should be provided for historical periods. The methodologies

used to calculate or estimate the metrics should also be included.

The targets used by the organization to manage climate-related risks and opportunities

and performance against targets• Their key climate-related targets (such as those related to GHG emissions, water usage, energy

usage)

• Other goals including efficiency or financial goals through the entire life cycle of products and services

• Whether the target is absolute or intensity; time frames over which the target applies; key performance

indicators, etc.

[Metrics and Targets]

The TCFD recommendations require an organization to describe the metrics used to assess

climate-related risks and opportunities in line with its strategy and risk management process;

GHG emissions; the targets to manage climate-related risks and opportunities, and

performance against targets



The metrics and

targets used to

assess and

manage relevant

climate-related

risks and

opportunities

where such

information is

material

Scenario analysis can help organizations consider issues whose possible outcomes are

highly uncertain and will play out over the medium to longer term. It can also enhance

organizations’ strategic conversations about the future.

Organizations with more significant exposure to climate-related issues should consider

disclosing key assumptions and pathways related to the scenarios they use. Scenario

analysis is complex and requires resources, but brings benefit to organizations.

Why scenario

analysis is a

useful tool

Target Applicable scenarios

Transition risks

IEA WEO 450/ETP 2DS/IEA WEO Bridge/IEA WEO INDC

(2C or lower scenarios and other scenarios)

Deep decarbonizaion Pathways Project (2C or lower scenario)

IRENA Remap (the renewable energy ratio to be doubled by 2030)

Greenpeace Advanced Energy [R]evolution (2C or lower scenario)

Physical risks IPCC Representative Concentration Pathway (RCP) Scenarios: RCP8.5, RCP6.0, RCP4.5,

RCP2.6

[Significance of Scenario Analysis (i)]

The TCFD recommends that organizations perform scenario analysis to assess the potential

business implications of climate-related risks and opportunities, and disclose assessments.

The TCFD’s technical supplement provides more information on scenario analysis

The TCFD recommends that organizations perform scenario analysis to assess the potential

business implications of climate-related risks and opportunities, and disclose assessments.

The TCFD’s technical supplement provides more information on scenario analysis.

Sources: prepared by the Ministry of Environment based on the Task Force on Climate-related Financial Disclosures, “Final Report - Recommendations of the Task Force on

Climate-related Financial Disclosures”, 2017. p. 25-29, the Task Force on Climate-related Financial Disclosures, “Technical Supplement - The Use of Scenario Analysis

in Disclosure of Climate-Related Risks and Opportunities”, 2017. p.21 and p.25

22

[Significance of Scenario Analysis (ii)]

Scenario analysis can enhance strategic planning in response to uncertainty in future, as

well as internal and external dialogue

In a reasonably foreseeable term... In a longer term, where outcomes are highly

uncertain, and possibly promising...

• Business strategy cannot respond to changes in

future.

• The discussion never reaches a consensus on

future perspectives.

• Suspected of lacking business resilience

• Business management can flexibly respond to future

change.

• The discussion takes place without any subjective

viewpoints on future.

• Management can demonstrate business resilience.

Target

Vision

Medium-term business plan (3-5 years)

23

Assume multiple scenarios

24

[Corporate Challenges in Performing Scenario Analysis]

The Practical Guide supports companies in handling three challenges frequently faced

when performing scenario analysis

When undertaking scenario analysis, companies often face the following three

challenges.(i) Actual scenarios for analysis and key parameters to be tied are not easily accessible to a

wide majority of companies.

(ii) Scenario analysis requires different execution processes and participation of different

divisions or departments, depending on the nature of companies. One cannot say that a

certain division or department in the organization should undertake scenario analysis.

(iii) It is fairly hard work to make management understand the results of scenario analysis.

The Practical Guide offers solutions to these challenges.* (i) and (ii): Understand “Practice Examples”, “Disclosure Examples”, and “Importance of

Risks”.

* (iii): Perform scenario analysis with parameters that you can handle. Start dialogue

with management over the (quantitative) results.

The key is to begin scenario analysis with what you understand, and progress

and deepen your knowledge and experience.* e.g. First, conduct qualitative scenario analysis. Then, try quantitative scenario analysis.

* e.g. First, apply scenario analysis to a certain segment. Then, apply to a greater part of your

company.

2. Scenario Analysis - Practice Examples

Chapter 2. Scenario Analysis -

Practice Examples (six companies)

This chapter presents scenario analysis performed by selected companies

under the support program of the Ministry of Environment and explains

how to undertake scenario analysis.

25

The Ministry sorted points to consider when a company performs scenario analysis in

line with the TCFD recommendations. A selected six companies tentatively performed

scenario analysis.

Scenarios inclusive of a

range of transition and

physical risks relevant to

the organization

Impact on:

• Input costs

• Operating costs

• Revenues

• Supply chain

• Business interruption

• Timing

Responses might include

• Changes to business

model

• Changes to portfolio mix

• Investments in

capabilities and

technologies

Market and

Technology

Shifts

Reputation

Policy and

Legal

Physical

Risks

Assess materiality of

climate-related risks

Identify and define

range of scenarios

Evaluate business

impacts

Identify potential

responses

Ensure

governance

is in place

Document and

disclose

1

6

2 3 4 5

Integrate scenario analysis into strategic planning and/or enterprise risk management processes.

Assign oversight to relevant board committees/sub-committees.

Identify which internal (and external) stakeholders to involve and how.

What are the current and

anticipated organizational

exposures to climate-related

risks and opportunities?

Do these have the potential to

be material in the future? Are

stakeholders concerned?

What scenarios (and

narratives) are appropriate,

given the exposures?

Consider input parameters,

assumptions, and analytical

choices. What reference

scenario(s) should be used?

Evaluate the potential effects

on the organization’s strategic

and financial position under

each of the defined scenarios.

Identify key sensitivities.

Use the results to identify

applicable, realistic decisions

to manage the identified risks

and opportunities.

What adjustments to

strategic/financial plans would

be needed?

Document the process; communicate to relevant parties: Be prepared to disclose key

inputs, assumptions, analytical methods, outputs, and potential management responses

(Notes in red: Points to consider in each step were added after the support program.)

Pick and choose from

your industry

and company viewpoint!

Disclose information

from readers’ viewpoint!

Get management

and operation

divisions involved!

Clearly imagine a future world

under certain assumptions!

Try not to seek

too much accuracy!

Do not narrow down!

Take multiple scenarios

into account.

Sources: The Task Force on Climate-related Financial Disclosures, “Technical Supplement - The Use of Scenario Analysis in Disclosure of Climate-Related Risks and

Opportunities”, July 2017.26

An example of TCFD 2C scenarioTransition Scenario (IEA)

• IEA ETP 2DS Scenario

• IEA WEO 450 Scenario

Physical Scenario (IPCC)

• RCP2.6 Scenario (0.3-1.7C)

An example of TCFD 4C scenarioTransition Scenario (IEA)

• IEA WEO New Policies Scenario (4C)



States “business as usual”.

27

[Scientific Scenarios for Analysis]

Consider climate change in an uncertain future with multiple scenarios

The temperature will

rise 0.3-1.7C above

pre-industrial levels, if

strict measures are

taken.

The temperature will rise 2.6-

4.8C above pre-industrial

levels, unless more rigorous

measures are taken.

[Forecast of global average surface temperature]

(difference from the 1986-2005 average)

4C Scenario

2C Scenario

4C Scenario

2C Scenario

2030

The 2C and 4C scenarios

describe similar temperature

changes by 2030.

They describe considerably

different futures 30 years ahead.

Sources: Figure SPM.6 in the Synthesis Report (SYR) of the IPCC Fifth Assessment Report (AR5); International Energy Agency (IEA), “ETP 2017”; UNEP, “the Emission Gap Report 2015”;

website of the Ministry of Foreign Affairs; and TCFD, “The Use of Scenario Analysis in Disclosure of Climate-Related Risks and Opportunities”

Other TCFD scenariosTransition Scenario (IEA)

• IEA WEO current policy scenario (6C)

States “business as usual”.




Other scenarios

28

[Example Schedule]

Approximately three months are spent on the scenario analysis process from

assessment of importance of risks to definition of countermeasures

The support program has revealed that it is possible to perform scenario

analysis with the assistance of a consulting firm in approximately three months.

1st 2nd 3rd 4th 5th Board meeting

1week

2week

3week

4week

5week

6week

7week

8week

9week

10Week

11Week

Meeting

(i) Assess

materiality of

climate-related

risks

(ii) Identify and

define range of

scenarios

(iii) Evaluate

business impacts

(iv) Identify

potential

responses

29

[Implementing Structure]

The key to success is to get everyone involved, according to staff in charge of scenario

analysis at the companies participating in the support program

Environment/

CSR

Operation

Div.

Accounting/

Finance

...

Management

Pattern A Pattern B

Advantages

• Easy to start

• Minimum burden on divisions concerned

Disadvantages

• Internal coordination needed in the scenario

analysis process

• Long process from the environment/CSR division

to management

Advantages

• Divisions are cooperative as internal coordination

is completed in advance

• The process swiftly reaches top management as a

well-coordinated team performs analysis

Disadvantages

• It takes time to start analysis

• Great burden on divisions concerned

STEP2Start ......

Planning

STEP3

Environment/CSR

Operation

Div.

Accounting/

Finance

Management

Planning

Scenario analysis team

Get relevant divisions and departments involved in the

course of scenario analysis.

Form a team within company before embarking on

scenario analysis.

...

* Sample image * Sample image

IR

IR

Examples of scenario analysis performed by the selected companies, and references for importance of risks

Contents (Practice Examples)

Sector under the

TCFD definitionCompany

Pages in the Practical Guide

for Scenario Analysis

References

for

importance

of risksSTEP2 STEP3 STEP4

Energy (i) ITOCHU Corporation p.33 p.34-37 p.38 p.106-118

Transportation

(ii) Mitsui O.S.K. Lines, Ltd. p.40 p.41-47 p.48-49 p.120-126

(iii) Japan Airlines Co., Ltd. p.51 p.52-54 p.55 p.127-136

(iv) MITSUBISHI MOTORS

CORPORATION(p.58, 61) p.57, 60 p.58, 61 p.137-145

Buildings/

Forest

Products

(v) Sumitomo Forestry Co., Ltd. p.63-64 p.65-73 p.74-75 p.147-160

(vi) Tokyu Fudosan Holdings

Corporationp.78 p.79, 81 p.78, 80 p.147-160

30


(i) ITOCHU Corporation

(ii) Mitsui O.S.K. Lines, Ltd.

(iii) Japan Airlines Co., Ltd

(iv) MITSUBISHI MOTORS CORPORATION

(v) Sumitomo Forestry Co., Ltd.

(vi) Tokyu Fudosan Holdings Corporation

31

ITOCHU Corporation■Textile Company Apparel Division

Brand Marketing Division 1

Brand Marketing Division 2

■ Machinery Company Plant Project, Marine & Aerospace Division

Automobile, Construction Machinery &

Industrial Machinery Division

■ Metals & Minerals Company Metal & Mineral Resources Division

■ Energy & Chemicals Company Energy Division

Chemicals Division

■ Food Company Provisions Division

Fresh Food Division

Food Products Marketing & Distribution Division

■ General Products & Reality Company Forest Products & General Merchandise Division

Construction & Logistics Division

■ ICT & Financial Business Company ICT Division

Financial & Insurance Business Division

Power Project Department

Department in charge of

scenario analysis

4 52 3STEP

Introduction of carbon pricing will lead to a rise in power generation costs and changes

in energy mix, which will have great financial impacts.

Risk item Business impact (examples of considerations)

Carbon pricing/emission

rights trading

• Introduction of carbon pricing and emission rights trading will increase the cost of thermal power

generation.

(It is highly likely that the cost will not be able to be passed on in the sales price.)

• Competitive advantages for renewable energy will increase.

Large

Carbon dioxide emission

targets/policies of

countries

• Strict regulations will require the company to consider selling assets or making additional

capital investment.Large

Change in energy mix

• Electricity from particular resources will become unsaleable, opportunity loss will occur, or sales

will decrease.

• The Company will have to consider selling assets, or making capital investment in alternative

energy resources.

Large

Spread of recycling and

energy-saving

technologies

(CCS, storage batteries,

resource-saving design,

etc.)

• If carbon capture and storage (CCS) is made mandatory for thermal power generation, extra costs

will be incurred.

• A drastic shift to renewable energy will require huge investment in storage batteries and grid

systems.

• If a new, low-cost and high-efficiency renewable or energy-saving technology emerges, the demand

for thermal power generation will decrease.

Large

Renewable energy prices

(FIT price)

• Sales prices of new renewable energy projects will decline.

• Competitive advantages for renewable energy will increase.Large

Changes in the

reputations among

investors

• Divestment will accelerate, and continuation of the thermal power generation business will increase

fund-raising costs.Large

STEP 2 “Assess materiality of climate-related risks”

Climate-change risks and opportunities for the power generation segment

33

(C)

2030

4C 2C4 5 ScenarioSTEP

Sources: Figure SPM.6 in the Synthesis Report (SYR) of the IPCC Fifth Assessment Report (AR5); International Energy Agency (IEA), “ETP 2017”;

UNEP, “the Emission Gap Report 2015”; and website of the Ministry of Foreign Affairs

[Forecast of global average surface temperature (difference from the 1986-2005 average)]

4C Scenario

2C Scenario

The temperature

will rise 0.3-1.7C

above pre-

industrial levels, if

strict measures are

taken.


rise 2.6-4.8C above

pre-industrial levels,

unless more rigorous

measures are taken.

• Nationally determined

contributions (NDCs) for each

county are 3-4C increase levels.

• Partly pressed by investors and communities, the

energy sector starts to set targets and drive low-

carbon and carbon-free actions.

2 3

STEP 3 “Identify and define range of scenarios”

Consider society in 2040 with two scenarios of climate change that are highly uncertain.

34


IEA’s and Other Assumptions based on Scientific Grounds

Present

(2014)

2040

SourcesWorld 40 years ahead in the

4C scenario

World 40 years ahead in the

2C scenario

Carbon

pricing/

emission

rights trading

Carbon

pricing/

emission

rights

trading

N/A N/A $140/t (US)• IEA WEO2016

(450 scenario)

Carbon

emissions

targets/

policies*

Fossil fuel

prices

Coal: $78/t

Gas: $4.4/Mbtu (US)

Coal: $108/t

Gas: $7.5/Mbtu (US)

Coal: $77/t

Gas: $5.9/Mbtu (US)

• IEA ETP 2016

(4DS, 2DS)

Renewable

energy

prices

(FIT price)

(US)**

N/A

PV utility scale: 7.2-8.8 yen/kWh

Onshore wind power: 6.2-7.7yen/kWh

PV utility scale: 6.6-7.1yen/kWh

Onshore wind power: 6.2-7.7yen/kWh

• IEA WEO2016

(NPS, 450 scenario)

Changes in

energy mix

Energy

output by

source

(US)

Coal thermal: 1,713TWh (40%)

Gas thermal: 1,161 TWh

(27%)

Renewable: 570 TWh

(13%)

Coal thermal: 1,016 TWh

(21%)

Gas thermal: 1,480 TWh

(30%)

Renewable: 1,488 TWh (30%)

Coal thermal: 153 TWh (3%)

Gas thermal: 959 TWh (20%)

Renewable: 2,560 TWh (54%)

• IEA WEO2016

(NPS, 450 scenario)

Spread of

renewable

and energy-

saving

technologies

Penetration

rate of CCSN/A N/A

Coal thermal with CCS: 64%

Gas thermal with CCS: 18%

• IEA ETP 2016

(2DS)

35

4C 2C4 5 ScenarioSTEP 2 3


In the 4C scenario, the world will see an increased share of renewable energy, while

the Company will continue following the present path towards further expansion

4C 2C52 ScenarioSTEP

While keeping the portfolio on an extension of the present path, enhance the business continuity plan

(BCP) to respond to physical risks

Encourage active disclosure and dialogue to secure reputation

A worldwide increase in

electricity demand

Overall electricity demand will

increase.

Advanced countries will see a

decline in demand for coal and

other thermal power generation

(though gas power generation will

increase).

A drop in the cost of renewable

energy will encourage some

consumers to shift to renewable

energy.

Typhoons and floods will cause

power failures.

Power company/

consumer

A certain policy effort towards a low-carbon society Gradual abolishment of subsidies to fossil fuels

Enhanced standards for power generation efficiency

Adoption of carbon tax by some countriesGovernment

Departure from centralized

power generation

Spread of decentralized and self-power generationAlternatives

Increased entries in the IPP and PPS

markets

More IPPs and PPSs in some regions

New entry

A drop in the cost of renewable

energy

Evolution of low-carbon power

generation technology, and a drop in

the cost of renewable energy

The adoption cost of renewable

energy stabilizing technology will

remain high.

CCS will not become common.

Technology

A rise in material costs

Increased demand for coal

and gas, and a rise in their

prices

Supplier

(raw

materials)

Encourage disclosure and dialogue

Pressure on fossil fuels Divestment from coal and petroleum

Steady or slightly increased investment in renewable energyInvestor

Action

The portfolio will remain on an

extension of the present path

Overall electricity demand will increase.

The share of renewable energy will gradually

increase, while demand for coal power generation

will also increase in developing countries.

The additional cost of carbon tax and CCS will be

limited, so thermal power generation will remain

profitable.

Physical risks will increase power generation costs.

Industry/ Itochu

Enhance disaster preparedness and BCPAction

43

36

The share of renewable energy will

considerably increase.


Most electricity will be generated with renewable

energy.

Gas will replace coal as a backup source for renewable

energy stabilization. (A drop in coal demand)

Because of the additional cost of carbon tax and CCS,

thermal power generation will become less profitable.

52 ScenarioSTEP

While constructing a business portfolio focusing on renewable energy in line with the world trend of

departure from carbon, pursue new electricity business opportunities

Industry/Itochu

Pressure on fossil fuels Divestment from coal and petroleum

Increased investment in renewable energyInvestor

More entries in the IPP and PPS

markets

More IPPs and PPSs in some regions

New entry

Changes in material costs

Gas prices will increase.

Coal prices will gently decrease.

Land prices for renewable energy will

increase, and the land market will be

more competitive.

Supplier (raw materials)

4C 2C

Abolishment of subsidies to fossil fuels

Enhanced standards for power

generation efficiency

Adoption of carbon tax by many countries

Subsidies to CCS will be granted/increased.

More countries will adopt “Capacity Market”.

Government

Enhanced efforts towards a low-carbon society

A worldwide increase in

electricity demand


Carbon pricing will be adopted, dampening

demand for thermal power generation.

A drop in the cost of renewable energy will

encourage consumers to shift to

renewable energy.

Power company/consumer

ActionReview the portfolio, and

supply highly competitive

energy

A drop in the cost of

renewable energy

Evolution of low-carbon power generation

technology, and a drop in the cost of

renewable energy

Further development of renewable energy

and electric vehicles, and inflated prices

of storage battery and scares resources

CCS will become common.

Technology

Increase investment related

to renewable energyAction

Action Increase the share of renewable power

generation

Departure from centralized power

generation

Spread of decentralized and self-power generation

Alternatives

Action Go into decentralized and self-power

generation businesses

43STEP 3 “Identify and define range of scenarios”

In the 2C scenario, the world will reduce the use of thermal power generation,

and substantially increase the share of renewable energy

37

STEP 4 “Evaluate business impacts”

Under both the 2C and 4C scenarios, the Company will maintain at least the

current level of income

4C 2C4 52 3 ScenarioSTEP

4C Scenario

There are possibilities that:

• Gas power generation will be

more profitable.

• Coal power generation will be

less profitable.

• Renewables will also be less

profitable.

• Accumulated income will drop.

2C Scenario

(100% carbon tax)

• Power generation other

than renewables will be

subject to carbon tax,

which will result in a

substantial drop in

profitability.

• But the Company will be

able to maintain or

increase profitability by

building new renewable

plants.

Lower profitability

of coal power

generation

Higher profitability

of gas power

generation

Lower profitability

of renewables

Accumulated profit

from power sources

built in 2021-40

Accumulated profit

from power sources

built in 2021-40

Course of events Focus on renewables

Increased

profit from

expansion of

coal power

generation

Increased

profit from

expansion of

gas power

generation

Increased

profit from

expansion of

renewable

power

generation

Reduction

in gas/oil

power

generation

Decreased

profit from

carbon tax

CCS

cost

Carbon tax

saving from

CCS

adaption

Reduction

in coal

power

generation

Carbon tax and

CCS cost

saving from

reduction in

gas/coal power

generation

Expansion

in

renewable

power

generation

Accumulated

profit from

power

sources built

in 2021-40

Accumulated

profit from

power

sources built

in 2021-40

Accumulated

profit from

power sources

built in 2021-40

(renewable-

focused)

(Image)

(Image)

38

39








40

Risk item Business impact

Tra

ns

itio

n r

isk

Increase/decrease in

Key products and prices

• Changes in energy mix will impact the demand for key cargo transport (crude oil, petroleum products, petrochemicals, coal, LNG),

leading to fluctuations in profit of ocean shipping business

• Transition to a low-carbon society will decrease the demand for coal and petroleum, which will reduce the cargo volume and profit in

the ocean shipping business.

• However, the spread of CCS and CCU can revive the demand for coal transport, enabling the shipping business to maintain profit.

• Spread of EVs and other next-generation vehicles will substantially change the ways of completed vehicle transport and supply

chains. This will reduce the vehicle transport volume and lower profit in the ocean shipping business.

• Spread of renewable energy will increase the demand for hydrogen transport, which can help maintain profit in the ocean shipping

business.

• Increased demand for onshore wind power generation will increase profit from development of onshore facilities (costs of

transport and installation), which will increase profit in the ocean shipping business.

• Climate change will adversely impact cereal crop harvests, which will lower the demand for bulk cargo transport and reduce profit in the

ocean shipping business.

LargePromotion of next-generation

vessels

• Shippers will expect environmental considerations in transport, calling on the ocean shipping business to shift to next-generation

vessels. This will increase R&D costs, capital investments, and overall expenditures.

• Adaption of next-generation vessels will save fuel costs and payments of carbon tax, reducing overall expenditures.

National regulations on

SOx/NOx

• The 2020 IMO fuel sulphur regulations will require the ocean shipping business to purchase appropriate fuel. This will increase

operating costs and overall expenditures.

• Installation of SOx scrubber systems will increase capital costs and overall expenditures. Promotion of alternative fuels, though not

directly related to climate change or global warming, can indirectly contribute to CO2 emissions reduction.

Energy-saving policy

(EEDI/Energy efficiency laws)

• The EEDI for new ships will tighten the regulations (Phase 2 from 2020 and Phase 3 from 2025), which will inflate ship prices, and

increase maintenance costs and overall expenditures.

Energy-saving subsidies

• Access to energy-saving subsidies will save capital investment, and reduce overall expenditures.

• FIT and other policies to promote renewable energy will reduce the demand for crude oil, coal and LNG transport, the transport

volume, and income in the ocean shipping business.

• An increase in the demand for biomass fuel transport will increase the transport volume and income in the ocean shipping business.

Trend in energy demand• Stricter regulations on the use of cleaner fuels or those with less environmental impact will increase the costs of technology

development, capital, fuel and vessels (including crew training costs), and overall expenditures.

Carbon pricing• If market-based measures (MBMs) for GHG from ships are made obligatory by IMO, fuel will be charged, and ship operators will have

to purchase emission rights for emissions exceeding their allocated volumes. This will increase overall expenditures.

Medium

to large

Oth

ers

Change in reputation among

customers (shippers) and

investors; melting of permafrost

and glaciers; extremely

abnormal weather; etc.

• General preference to transport means with environmental considerations will increase the demand for vessels.

• Development of the North Sea Route will reduce traveling time, and the capital and travel costs. This will lead to more new contracts and

increase freight revenue.

• Abnormal whether and typhoons require ship operators to change navigation routes to longer routes. This can damage reputation from

shippers.

Small to

medium

Climate-related Impact on Mitsui O.S.K. Lines4 52 3STEP

Adoption of carbon pricing and emission rights trading will increase vessel fuel costs and overall expenditures.

In addition, investment in development of next-generation vessels will have considerable financial impacts.

41

Consider society in 2030 with two scenarios


rise 0.9-2.3C above

pre-industrial levels, if

strict measures are

taken.

Source: Figure SPM.6 in the Synthesis Report (SYR) of the IPCC Fifth Assessment Report (AR5)


rise 3.2-5.4C above pre-

industrial levels, unless

more rigorous measures

are taken.

[Global average surface temperature (difference from the 1986-2005 average)]

(C)

2030

4C Scenario

2C Scenario

2C4 52 3 ScenarioSTEP 4C

42

Assumptions in the Scenarios2C4 52 3 ScenarioSTEP 4C

Present2030

SourcesWorld in the 4C scenario World in the 2C scenario

Increase/

decrease in

Key

products

and prices

Total traffic

volume

66,000 G tonne-km/year

(2015)113,588 G tonne-km/year 101,178 G tonne-km/year

• 2ii

(ACT, LCT scenarios)

Coal traffic

volume



• IEA WEO2017/2ii


Petroleum traffic

volume



• IEA WEO2017/2ii


Automobile

traffic volume

36.2 million vehicles/year

(2017)53.02 million vehicles/year 43.27 million vehicles/year

• The Global Calculator V23

(IEA 2DS/4DS scenarios)

Steel demand1,670Mt

(2014)1,855Mt 1,855Mt

• IEA ETP 2017

(RTS, 2C scenario)

LNG demand3,635bcm

(2014)4,269bcm 4,545bcm

• IEA ETP 2017

(RTS, 2C scenario)

Demand for

onshore wind

power generation

350GW

(2014)1,255GW 1,840GW

• Agency for Natural Resources

and Energy, Renewable Energy

Institute, Japan Maritime Center,

etc.

Spread of

next-

generation

vessels

Spread of next-

generation fuels

FAME: 1,040USD/Mt, 38MJ/kg

MDO: 482USD/Mt, 43MJ/kg (2016)n.a. n.a.

• IEA Bioenergy report “Biofuels for

the marine shipping sector”

EEDI regulations Phase 1 = 10%Phase 3 = 30%

(in and after 2025)

Phase 3 = 30%

(in and after 2025)• IMO

Regulations

CO2 emissions of

global marine

transport

810 million tonnes

(Emissions from ships worldwide,

2010)

924 million tonnes

(Emissions from ships

worldwide)

823 million tonnes

(Emissions from ships

worldwide)

• 2ii

(UMAS Scenarios 8, 10)

Carbon

pricing

Carbon tax* Average bidding price: Approx. $8/t

at the EU-ETS

Europe: $37/t

China: $23/t

Japan, North America, Europe:

$100/t

China: $75/t

• IEA WEO 2016

(450, NPS scenario)

• “Implementation and

Considerations of Emissions

Trading in Selected Countries”, a

Ministry of Environment report,

2016

Fuel price Petroleum: $97/bbl Petroleum: $113/bbl Petroleum: $97/bbl • IEA ETP 2016/2ii

43

CO2 Emissions from the Global Maritime Transport Sector

Source: UMAS, “CO2 Emissions from International Shipping - Possible reduction targets and their associated pathways”, 2016. P.45

4C Scenario

2C Scenario

Opt 2 = Scenario 8:

• The scenario sets CO2 emissions targets at 33Gt during the period 2010 to 2100 on the assumption that MBM starts in 2025 and

20% of the total revenue from carbon pricing can be used to purchase C2 offsets. It is used as an ATC scenario (2C) in the 2ii report.

Opt 5 = Scenario 10:

• The scenario sets CO2 emissions targets at 79Gt during the period 2010 to 2100 on the assumption that MBM starts in 2025 and

80% of the total revenue from carbon pricing can be used to purchase C2 offsets. It is used as an LCT scenario (4C) in the 2ii report.

2C4 52 3 ScenarioSTEP 4C

44

World in the 4C Scenario: More Natural

Disasters and Inflated Fuel Costs 4C 2C4 52 3 ScenarioSTEP

CO2 SOｘ NOxｘ

CO2

CO2Government

FCVEV

Biofuel

Higher port charges

due to a rise in sea levels

Increased demand for

biofuel as an alternative

Fossil fuel

...

Regulations in line with

rules of the international

community

No change in EEDI or other

regulations or policies.

Regulations will not work

properly even after MBM starts.


onshore wind power

generation

Development of

icebreakers eyeing to

the North Sea Route


EVs, increasing the

cargo volume

Inflated fossil fuel prices,

increasing the cargo

volume

Storms and cyclones will force ship operators to change

navigation routes. This will increase the capital and fuel

costs, cause delays in delivery, and pose adverse impacts

on ferry terminals.

IMO

45

World in the 2C Scenario: Cleaner Society, Shift to Renewables,

and Dampened Demand for Fossil Fuel4C 2C4 52 3 ScenarioSTEP

More use of EVs and

hydrogen

Carbon

tax rise

EV

FCV

Government

BiofuelHydrogenCO2

Fossil fuel

Steel

Decreased demand

due to spread of

lighter vehicles

Wider application of carbon tax

Change in fossil fuel demand

Shift to local production

for local consumption,

which emits less carbon

dioxide

Development of

icebreakers eyeing the

North Sea Route Increased demand for

onshore wind power

generation

Green energy

IMO

Stricter

regulations to

80% cuts

Stricter EEDI regulations,

start of MBM, stricter

regulations on SOx and

NOx

Development of next-

generation fuels

CO2 NOx

SOx

World in the 2030s in the 4C scenario

46

World in the 4C scenario, the Company will continue following the

present path towards further expansion.

Accelerating

technology innovation

Suppliers will develop EEDI-

compatible, high-fuel efficiency

technologies, and see

increased development costs of

next-generation vessels.

Subsidy schemes will help

them save capital investment.Shipping industry

ActionRequest incentives/

subsidies

Supplier

Higher demand for

fossil fuel

Adoption of carbon tax and MBM

will increase petroleum and coal

fuel prices.

More use of LNG as alternative

Increased demand for biofuel as

alternative, but increase will be

limited due to prices and supply

volume

Action Consider prices of

alternative fuels and

suppliers

Energy

business

No impact on new entry

New entries will have no impact from climate

change.

New entry

(No particular action needed)

Rainstorm, typhoon, rise in

sea levels

Physical risks will emerge, which will

increase insurance costs.

Traffic volume will increase as a result of

population growth.

A rise in sea levels will result in higher port

charges.

Action

Industry/MOL

Comply with EEDI regulations and

develop technology to reduce

environmental burden

Entry in related businesses

Development of the North Sea Route and

related businesses


Change in transport

demand

Changes in navigation routes

will increase the capital and fuel

costs, and cause delays in

delivery.

Promotion of renewable energy

will slightly decrease coal

transport, increase oil and

biomass fuel transport, and

substantially increase natural

gas transport.

Increased demand for onshore

wind power generation

Poor harvests will reduce

transport demand.

Substantial increase in demand

for EVs will change transport

supply chains.

Adverse impacts on ferry and

terminal businesses

Customer

Action Develop navigation

routes and vessels

compatible with climate

change

Call for understanding

of an increase in capital

investment

More subsidies

No change in EEDI or other

regulations or policies

IMO targets of 50% cuts by

2050 will continue.

Adoption of carbon tax and

MBM (charges on vessel fuel,

and obligation to purchase

emission rights)

Harbors and ports will be

developed to meet the new

regulations

Enhanced SOx/NOx

regulations will accelerate the

use of alternative fuels.

Action

Government

Enhance and maintain

liaison with the

government to swiftly

gain information about

any revisions to

regulations

4C 2CScenario4 52 3STEP

Alternatives

World in the 2030s in the 2C scenario

47

World in the 2C scenario: More Action Needed towards

a Low-Carbon Society

Accelerating

technology innovation

Suppliers will develop EEDI-

compatible, high-fuel efficiency

technologies, and see

increased development costs of

next-generation vessels.

Subsidy schemes will help

them save capital investment.

Low-carbon technology will

help increase vessel prices and

lease charges.

Shipping industry

ActionInvestment in next-

generation technology

(joint investment)

Increased fossil

fuel costs

Adoption of carbon tax and

MBM will increase fossil fuel

prices.

Rapid spread of LNG fuel as

alternative

Hydrogen supply chain will be

put into practice.

Increased demand for biofuel

as an alternative, but the

increase will be limited due to

prices and supply volume

ActionShift from fossil fuel to

alternative fuels

No impact on new entry

New entries will have no impact from

climate change.


Predict moves towards

a low-carbon society based on

climate change external factors.

Vessels will consume less fuel.

(LNG ships, higher engine efficiency, higher

propeller efficiency, reduced ship resistance)

The industry will promote technology

development of next-generation fuels.

Action Develop technology towards

a low-carbon society

Consider impacts of land

transport on marine transport

Accelerated modal shift

Development of the North Sea Route and

related businessesAction

Intensified

actions for

climate change

(Stricter MBMs and carbon tax)

Many countries will raise

carbon tax rates, which will

impact office and offshore

businesses.

IMO targets of 50% cuts of

GHG by 2050 will continue.

EEDI regulations will

continue, and more effective

MBMs will be adopted.

(charges on vessel fuel, and

obligation to purchase

emission rights)

Enhanced SOx/NOx

regulations will accelerate

the use of alternative fuels.

Harbors and ports will be

developed to respond to

short-term abnormal weather.

Action Adopt next-generation

ships under

partnership with

government, and build

a supply chain

4 52 3STEP 4C 2CScenario

Change in portfolio

(gradual shift from

fossil fuel transport)

Decline in fossil fuel

transport

Increase in renewable/EV

transport

Promotion of renewable

energy will decrease coal and

oil transport, and increase

biomass fuel transport.

Increased demand for onshore

wind power generation

Consumers will opt for low-

carbon-oriented, local

production for local

consumption. Traffic volume

will not increase in proportion

to population growth.

Substantial increase in

demand for EVs will change

transport supply chains.

Spread of lighter vehicles will

decrease steel demand.

Increase in electric furnaces

will decrease iron ore demand.

Impacts of population growth

will be minimal.

Poor harvest will reduce

transport demand.

Adverse impacts on ferry and

terminal businesses

Energy

business

Alternatives

Supplier New entry Customer Government

Industry/MOL

48

World in the 4C scenario, population growth and other factors will increase traffic

volume. The Company will use high-efficiency and

LNG vessels to deal with inflated fuel costs. 4C 2CScenario4 52 3STEP

Risk itemFinancial impact

indicatorSummary of impact Background of the impact

Magnitude of

impact

(¥100 million)

Tra

nsitio

nrisks

Increase/

decrease in key

cargoes

Coal traffic volumeSales (profit of ocean

shipping business)

Increase in traffic volume will increase profit

(freight revenue) of ocean shipping business.

The continued upward trend of coal demand, and population growth and vital economy will boost

coal demand further.

Petroleum traffic

volume

Sales (profit of ocean

shipping business)



The continued upward trend of coal demand, and population growth and vital economy will boost

coal demand further.

Automobile traffic

volume


shipping business)



Consumers will not have enough incentives to purchase next-generation vehicles because of

unsolved infrastructure problems, poor availability of related products, and high prices. So, the

vehicle market will remain focused on vehicles with an internal combustion engine (ICE).

Steel traffic volumeSales (profit of ocean

shipping business)



Currently, steel is used the most for construction and automobiles. It is hardly possible to

consider any alternative to steel for construction, so impacts of transition risks will be minimal.

(Increase in climate disasters will result in an increase in demand for stronger and more durable

materials.)

LNG traffic volumeSales (profit of ocean

shipping business)



The continued upward trend of LNG demand, and population growth and vital economy will boost

LNG demand further.

Traffic volume related to

onshore wind power

generation

Sales (cost of ocean

shipping business)

Increase in related projects will increase

profit (freight revenue) of ocean shipping

business.

Further spread of renewable energy and particularly an increase in demand for onshore wind

power generation using Japan’s outstanding technology will increase revenues from facility

construction (transport and installation costs).

Transport of otherproducts


shipping business)



The continued upward trend of demand, and population growth and vital economy will boost

demand further.

Energy-saving

policy/ regulations

/ carbon pricing

MBM/emission rights

trading

Expenditures (cost of

ocean shipping business)Emission trading will increase expenditures.

Emission trading will be adopted to achieve the CO2 reduction target by 2050, but the trading

volume will be limited. New technologies will be put in place to achieve the goal.

Inflated fuel pricesExpenditures (cost of

ocean shipping business)

Adoption of carbon pricing will inflate fuel

prices, which will increase cost (fuel costs)

of ocean shipping business.

Carbon pricing will slightly increase. This will be passed on to fuel prices in advanced countries,

causing financial impacts.

Trend in

energy demandInflated fuel prices



Rise in fuel prices due to supply-demand

balance will increase costs (fuel costs) of


Considerable rise in fossil fuel costs will have great financial impacts.

Energy-saving

policy/ regulations

/carbon pricing

EEDI and other

regulations



Adoption of high-efficiency vessels will

reduce cost (fuel costs) of ocean shipping

business.

Low-carbon transport modes will be required. Fuel efficiency of vessels will be improved, reducing

travel costs.



Regulations will increase new shipbuilding

costs.

To develop low-carbon transport modes, shipbuilders will seek high-efficiency vessels and install

high-efficiency facilities in existing vessels. This will increase shipbuilding and repair costs.

Spread of next-

generation

vessels

Adoption of LNG-fueled

vessels



Adoption of LNG-fueled vessels will impact

cost (fuel costs) of ocean shipping business.

Adoption of LNG-fueled vessels will reduce vessel fuel costs and costs equivalent to carbon

pricing.



Adoption of LNG-fueled vessels will increase

new shipbuilding costs.

Adoption of LNG-fueled vessels will require additional investment as the difference from

conventional vessels, having great financial impacts.

Spread of next-

generation

fuels (biofuels, etc.)



Spread of biofuels will increase cost (fuel

costs) of ocean shipping business.

Biofuels will become common and more easily available. Businesses will consider adopting such

fuels toward a low-carbon society.

49

World in the 2C scenario, fossil fuel traffic volume will decrease.

The Company will face greater burden of

emission trading and carbon tax. 4 52 3STEP 4C 2CScenario

Risk itemFinancial impact

indicatorSummary of impact Background of the impact

Magnitude of

impact

(¥100 million)

Tra

nsitio

nrisks

Increase/decrea

se in key

cargoes

Coal traffic volumeSales (profit of ocean

shipping business)

Decrease in traffic volume will reduce profit

(freight revenue) of ocean shipping business.Shift from fossil fuels to renewable energy will reduce the coal traffic demand.

Petroleum traffic volumeSales (profit of ocean

shipping business)

Decrease in traffic volume will reduce profit

(freight revenue) of ocean shipping business.Shift from fossil fuels to renewable energy will reduce the petroleum traffic demand.

Automobile traffic volumeSales (profit of ocean

shipping business)



Demand for EVs will considerably increase, affecting transport supply chain. A low-carbon

society will draw higher attention, reducing the growth of traffic volume of ICE. But population

growth will offset the reduction, and overall traffic volume will increase.

Steel traffic volumeSales (profit of ocean

shipping business)



Currently, steel is used the most for construction and automobiles. It is hardly possible to

consider any alternative to steel for construction, but steel can be replaced by lighter materials

such as aluminum, plastics, and CFRP for car bodies.

LNG traffic volumeSales (profit of ocean

shipping business)

Fluctuations in traffic volume will increase

profit (freight revenue) of ocean shipping

business.

Increased LNG demand in a low-carbon society will increase LNG traffic volume.

Traffic volume related to

onshore wind power

generation

Sales (cost of ocean shipping

business)

Increase in related projects will increase cost


Further spread of renewable energy and particularly an increase in demand for onshore wind

power generation using Japan’s outstanding technology will increase revenues from facility

construction (transport and installation costs).

Transport of other

products


shipping business)



The continued upward trend of demand, and population growth and vital economy will boost

demand further.

Energy-saving

policy/

regulations

/ carbon pricing

MBM/emission rights

trading

Expenditures (cost of ocean

shipping business)Emission trading will increase expenditures.

Emission trading will be adopted to achieve the CO2 reduction target by 2050, but the tradable

volume will be large. The Company will have to purchase emission rights if it fails to meet the

targets. This will increase expenditures.

Inflated fuel pricesExpenditures (cost of ocean

shipping business)

Adoption of carbon pricing will inflate fuel

prices, which will increase cost (fuel costs) of


Carbon pricing will increase. This will be passed on to fuel prices in advanced countries,

causing financial impacts.

Trend in

energy demandInflated fuel prices


shipping business)

Rise in fuel prices due to supply-demand

balance will increase cost (fuel costs) of


Slight rise in fossil fuel costs will increase fuel costs.

Energy-saving

policy/

regulations

/ carbon pricing

EEDI and other

regulations


shipping business)

Adoption of high-efficiency vessels will reduce


Low-carbon transport modes will be required. Fuel efficiency of vessels will be improved,

reducing travel costs.


shipping business)

Regulations will increase new shipbuilding

costs.

To develop low-carbon transport modes, shipbuilders will seek high-efficiency vessels and

install high-efficiency facilities in existing vessels. This will increase shipbuilding and repair

costs.

Spread of next-

generation

vessels

Adoption of LNG-fueled

vessels


shipping business)

Adoption of LNG-fueled vessels will impact


Adoption of LNG-fueled vessels will reduce vessel fuel costs by the amount equivalent to

carbon pricing.


shipping business)

Adoption of LNG-fueled vessels will increase

new shipbuilding costs.

Adoption of LNG-fueled vessels will require additional investment as difference from

conventional vessels, having great financial impacts.

Spread of next-generation

fuels (biofuels, etc.)


shipping business)

Spread of biofuels will increase cost (fuel

costs) of ocean shipping business.

Biofuels will become common and more easily available. Businesses will consider adopting

such fuels toward a low-carbon society.

50








Scenario Analysis in Practice -

STEP Assess materiality of climate-related risks (extract)2

List and categorize risk items into three groups in terms of assumed impacts on the

business

Category Risk item Assessment

Policy and

Legal

Targets and regulations on carbon emissions and fuel efficiency in the

airline industryLarge

Targets and regulations on carbon emissions and fuel efficiency in

relevant countriesMedium

Carbon pricing Medium

Technology

Shifts

Spread of alternative fuels Large

Improvement in fuel efficiency Medium

Development of next-generation airplanes Small

Market Shifts Inflated fuel prices Large

Physical

Risks

Increased severity of extreme weather events Large

Changes in rainfall and weather patterns Large

Rise in average temperature Medium to Large

51

Scenario Analysis in Practice -

STEP Identify and define range of scenario (extract)

The world in the 4C scenario will be an extension of the present.

No particular change

Fuel efficiency will

continue improving.

Airframe fuel efficiency will improve.

Development of supersonic transports

will progress.

Increased costs

Fuel efficiency will improve, but

development of next-generation

airplanes and spread of alternative

fuels will be limited.

Dependency on conventional jet fuel

will remain high and inflated crude oil

prices will increase fuel costs.

Rise in material costs

Gentle spread of biofuels

Inflated conventional jet fuel

prices

Continued increase in new

entries in the LCC market New LLC focusing on low-price oriented

customers will enter the airline market at the

present pace.

Considerable increase in

demand for international

flights

Demand will particularly increase in

developing countries.

Population growth and vital economy

will boost demand for logistics.

Interest in low-carbon energy and

modal shift to railways, etc., will be

limited.

Extreme weather events will be more

sever and more frequent, causing

concerns over service rates and

punctuality.

New entry

Further policy effort towards a low-carbon society

Some countries and regions will adopt carbon tax.

Enhanced fuel efficiency regulations

Industry/JAL

Substitutes

Customer

Supplier

(airframe makers)

Supplier

(raw materials)

Government

52

4C

Scenario

3

Scenario Analysis in Practice –

STEP Identify and define range of scenario

Consider a society with high climate uncertainty in 2030 with two existing scientific scenarios

(C)

2030

Sources: Figure SPM.6 in the Synthesis Report (SYR) of the IPCC Fifth Assessment Report (AR5); International Energy Agency (IEA), “ETP

2017”; UNEP, “the Emission Gap Report 2015”; and website of the Ministry of Foreign Affairs

[Forecast of global average surface temperature (difference from the 1986-2005 average)]

4C Scenario

2C Scenario

The temperature

will rise 0.3-1.7C

above pre-

industrial levels, if

strict measures

are taken.


rise 2.6-4.8C above

pre-industrial levels,

unless more rigorous

measures are taken.

53

3

Scenario Analysis in Practice –

STEP Identify and define range of scenario

In the 2C Scenario, alternative fuels will become more available, and modal shifts will

take place. Therefore, the Company may have to revise its supply chain and business model.

Modal shift to railways and

vessels

Fuel efficiency will

continue improving.

Development of next-generation

airplanes will progress.

Demand for higher fuel-efficiency,

next-generation airplanes will increase.

More efforts towards a

low-carbon society

Enhanced regulations will raise carbon

pricing.

More airline companies will use biojet

fuel.

Fluctuations in material

costs

Use of biojet fuel will vary among

regions, which can raise differences

in costs among regions

Carriers with electric airplanes

will enter the airline market.

Increase in demand for

international flights

Demand will particularly increase in

developing countries.

Interest in the environment will

heighten, and some customers may

shift transport modes to railways,

vessels, and other modes with lower

environmental burdens.

New entry

Considerable policy effort towards a low-carbon society More countries and regions will adopt carbon tax towards a carbon-free/low-carbon society.

Enhanced fuel efficiency regulations

More countries and regions will promote development and spread of alternative fuels towards a

carbon-free/low-carbon society.

Industry/JAL

Substitutes

Customer

Supplier

(airframe makers)

Supplier (raw

materials)

Government

54

2C Scenario

3

Scenario Analysis in Practice: STEP Evaluate business impacts

Analyze parameters based on financial and non-financial information, and estimate

financial impacts.

55

Financial information

B/S, P/L, breakdowns of

operating costs, etc.

Non-financial information

Fuel consumption and efficiency

CO2 emissions

Ratio of biojets

External information

IEA, ICCT, IATA and other reports

Publicly available information on

relevant countries

Other reports

Future B/S and P/L

Impacts by parameter (2C)

Impacts by parameter (4C)

Financial impacts on B/S and P/L (2C)

Financial impacts on B/S and P/L (4C)

4

56








57

1-3a STEP 3： Identify and define range of scenario (4C)In 2030 in the 4C Scenario, the world will see 1.5-2 fold increases in the number of natural disasters and resulting damage.

The scenario assumes that the use of electric vehicles will not be widespread.


People’s lives

Energy society Government policy

High demand for fossil fuels

ICE vehicles will remain the dominant form,

while the necessity for disaster-countermeasures will arise.

Regulations, subsidies, and other policy

will have less impact.

Severer

physical risks

Travel chiefly by carICE vehicles

Thermal power

generationCentralized

Conventional policy

Conventional business

form (production/

development/sale)

Conventional market

(advanced country-oriented)

Automobile industry

Mitsubishi

Motors

Natural disasters will occur

3.5 times more often

Sales of EVs will

increase 1.5 times

Fossil fuel costs

will increase

2.5 times

Renewables

will account for

15% of all

energy supply

Conventional corporate management

58

1-4a STEP4 : Evaluate business impacts (4C)

Changes in social environment

Events that can take place in the future

Future prediction

Choice and combinations of information, story-

making

Impacts on business

Interpretation of actual impacts

Business impacts

Impacts on

annual profit

• Changes in customer behaviors

• Enhanced carbon tax and ZEV

regulations

• Progress of next-generation vehicle

technology

• Drop in battery prices

Further spread of EVs

• Changes in consumer behaviors, government

policy, and technology progress will increase

car sales to 3 million cars per year. (Global

market)

Expanded share of EVs

• The share of EV sales will grow at a certain rate.

• Demand will increase chiefly for PHEV. The average battery capacity

will slightly increase.

• Battery costs will remain the same because of increased demand for

scarce resources and increased battery production.

• Capital investment and R&D will slightly increase to meet the increased

share of EVs.

Government subsidies

• Subsidies at the present level will be secured (for capital investment in

renewables)

• Inflated energy prices

• Accelerating renewable energy and

energy-saving development

Inflated energy prices

• Increased demand for fossil fuels will raise fuel

prices from 2,200 yen to 4,950 yen/barrel.

• The share of renewables will increase from 7%

to 15% in Japan. Demand for ancillary services

will increase, leading to higher electricity rates.

• Grid power procurement costs will increase

from 14,300 yen to 15,620 yen/Mwh.

Increased energy procurement costs

• Increased demand for fossil fuels will increase energy prices.

Further efforts for energy-saving and renewable energy development

• Energy consumption will be reduced to the mandatory annual rate set in

the Energy-Saving Act.

• More frequent and severe natural

disasters

Natural disasters will cause greater damage to

the economy.

• Temperature rises will lead to more frequent

and severer natural disasters.

In particular, Japan will experience more

torrential rains, 0.2 to 0.7 more times per year.

• Increased natural disasters will increase car

accidents and flood damage cars. This will

increase payments for insurance companies.

Increased damage to production facilities and supply chains

• The Company will have overall physical damage to supply chain,

suspension of operations, and worsening of working environment.

Enhanced efforts to protect supply chain

• The Company will enhance countermeasures against natural disasters

to minimize damage to supply chains to at least present levels.

Development of new technology to avoid physical risks

• Development of flood-ready vehicles

• Enhancement of V2X function

Sale of new-tech vehicles to avoid physical risks

• The Company will seek to expand the market share with new value

added.


59

(Reference) Examples of Actual Physical Risks (Business Impacts)

Mazda warns of 28 billion yen loss from Japan floods

Production disrupted for months in areas hit by rain

Mazda Motor expects a roughly 28 billion yen ($248 million) hit to operating

profit due to production cuts at the main factory (Hiroshima pref.) and the Hofu

plants (Yamaguchi pref.) from the torrential rains that flooded western Japan in July,

the company said.

They operated at reduced capacity in August and September, as paralyzed

transportation networks hampered workers’ commutes. …

For the year ending March, many factors squeezed earnings, such as the higher

costs of materials such as steel and precious metals, as well as spending to bolster

the automaker’s sales network in the U.S. and comply with tougher environmental

regulations. This leaves the company with little room to absorb the losses from

the rains from the reduced production of 28 billion yen.

(Nikkei Shimbun, September 21, 2018)

Mitsubishi Motors CEO Says West Japan Torrential Rains Reduce

Production of More than 10,000 Cars

Mitsubishi Motors Co. published consolidated financial results on November 6th. Net

profit increased 7% year-on-year to 51.8 billion yen due to strong sales of sports

utility vehicles (SUVs) and minivans in emerging economies including Indonesia,

Thailand and China. A series of natural disasters including the West Japan Torrential

Rains, and typhoons Nos. 21 and 24 caused the company to reduce production

worth 4 billion yen. The Company, however, achieved profit growth.

At a press conference for the first half of fiscal 2018, held on November 6th, the

Chief Executive Officer said: “The West Japan Torrential Rains caused tremendous

damage to Okayama prefecture, where our Mizushima Plant is located, and the

production declines totaled more than 10,000 vehicles.” “Thanks to the efforts of our

suppliers and many business partners, however, we managed to minimize the

impact on production and shipping”, he added.

(Nikkei Shimbun, November 6, 2018)

(Mitsubishi Motors Reports First-Half Financial Results for FY2018, November 6, 2018)

Vehicle Insurance Claims Exceed 20,000 - Nearly 70% in Heavy Rain-hit

Okayama and Hiroshima, a GIAJ report reveals

The General Insurance Association of Japan (GIAJ headed by Keiji Nishizawa)

compiled the number of car accident claims related to the torrential rains in west

Japan. A total of 48,303 insurance claims including vehicles (including commercial

vehicles), fire, and new types (including accident insurance) insurance claims were

brought to member insurance companies by July 17. Car insurance claims totaled

23,644. Member companies set up emergency headquarters at their head offices or

local branches in the afflicted prefectures, and started to inspect and collect flood-

damaged cars under insurance coverage...

(Daily Automobile (Nikkan Jidosha Shimbun), July 23, 2018)

Impacts of West Japan Torrential Rains and Typhoons

(100 million yen)

Impact of West Japan Torrential

Rains

Impacts of Typhoons Nos. 21

and 24

Operating profit

Non-operating and extraordinary

losses

Total

* Impacts in the 1st half of FY2018

60

People’s lives

Energy society Government policy

High demand for fossil fuels

Further electrification and modal shift

will increase demand for EVs.

Stricter policy to a carbon-free

society will result in higher

carbon tax and stricter

regulations.

Electrification

Renewables Decentralized

Efforts towards a carbon-

free society (energy-

saving facilities/ business

transfer)

Conventional market

(advanced country-

oriented)

Automobile industry

Mitsubishi

Motors

Natural disasters

will slightly increase

Sales of EVs will

increase 10 times

Fossil fuel costs will

increase 1.5 times

Renewables

will account

for 22% of all

energy supplyConventional corporate management

1-3b STEP3：Identify and define range of scenarios (2C)In 2030 in the 2C Scenario, the number of natural disasters and damage will remain almost present levels.

The scenario assumes that the use of renewables, energy-saving technology, and electric vehicles will steadily progress,

(and that, as a result, the 2C target will be achieved.)


CO2 emissions

from factories will

be cut 2% per year

Local production

will increase

Carbon tax

11,000 yen/t-CO2

ZEV regulations

will come to

effect worldwide

Modal shift/MaaS

Maas market will

expand 16 times

61

1-4b STEP4：Evaluate business impacts (2C)

4 52 3 ScenarioSTEP

Changes in social environment

Events that can take place in future

Future prediction

Choice and combinations of information, story-making

Impacts on business

Interpretation of actual impacts

Business impacts

Impacts on

annual profit

• Changes in customer behaviors

• Enhanced carbon tax and ZEV

regulations

• Progress of next-generation

vehicle technology

• Drop in battery prices

Further and quicker spread of EVs

• Changes in consumer behaviors, government policy, and

technology progress will increase car sales to a maximum

17.6 million cars per year. (global market)

Expanded share of EVs

• The share of EV sales will sharply grow. Sales of new cars will decrease under the

4℃ scenario.

• Demand will increase chiefly for EV. The average battery capacity will double.

• Adoption of alternative resources and sharp increase in battery production will more

than halve battery costs.

• Capital investment and R&D will increase to meet the increased share of EVs.

Government subsidies

• Subsidies will be secured for investment in battery development and renewables.

Credit incomes will also be secured.


• Accelerating renewable energy

and energy-saving development

Inflated energy prices

• Increased demand for fossil fuels will raise fuel prices from

2,200 yen to 3,630 yen/barrel.

• The share of renewables will increase from 7% to 22% in

Japan. Demand for ancillary services will increase, leading to

higher electricity rates.

• Grid power procurement costs will increase from 14,300 to

16,610 yen/Mwh.

Increased energy procurement costs

• For CO2 emissions reduction, inexpensive thermal power generation and oil prices

will cost more.

• Electricity will cost more because of carbon pricing on thermal power generation.

Further efforts for energy-saving and renewable energy development

• The Company will seek low-cost electricity through third-party PVs and grid power

companies.


• Accelerating renewable energy

and energy-saving development

• Spread of EVs

Development of a renewable energy decentralized society

• Increased use of renewables and inflated fossil fuel prices

will make the electricity system less stable.

This will lead to a decentralized society. More use of V2X

and reuse of batteries.

Entry in energy management business

• Launch of new businesses including sales of reusable batteries

• The Company will build a battery supply chain management scheme to minimize

costs of used batteries.

• Changes in customer behaviors Accelerating progress of Maas and urban traffic

• Heightened inclination to the environment and shift in

preference from ownership to sharing will facilitate

development of MaaS and urban traffic.

Decrease in new car sales

• Development of Maas and urban traffic will reduce new car sales in the global market.

Entry in new businesses

• Entry in Maas and CASE businesses will help the Company secure profit.

• More frequent and severe natural

disastersNatural disasters will cause greater damage to the economy.

• Temperature rises will lead to more frequent and severer

natural disasters. In particular, Japan will experience more

torrential rains, 0.2 to 0.5 times more per year.

• Increased natural disasters will increase car accidents and

flood damage cars. This will increase payments for

insurance companies.

Increased damage to supply chains

• More torrential rains will cause physical damage to supply chains, suspension of

operations, and worsening of working environments.

Enhanced efforts to protect supply chains

• The Company will enhance countermeasures against natural disasters to minimize

damage.

Creation of new value added

• The Company will deal more with V2H functions to increase the market share.

4C 2C

62








63

Risk item Business impact on timber and building material business Assessment

Tra

nsitio

n r

isk

Carbon emissions targets/policies • Governments’ forest carbon absorption policy will increase timber procurement costs.

Large

Forest protection policy • Governments’ adoption of timber tax and charges will increase timber procurement costs.

Renewable energy subsidies• Promotion of wood biomass business will increase sales. If the government stops subsidies,

sales will decrease.

Changes in energy mix

• If relevant countries incorporate biomass in their sustainability standards, sales will

increase.

• But increased demand will increase fuel costs (timber chips) in the biomass business.

Sluggish economic activities due

to stricter global warming

regulations

• If construction itself is regulated, supply and demand of timber and building materials will

be dampened, and sales will decrease.

Phys

ical risk

Rise in average temperatures

• Forest fires and pests will increase timber procurement costs.

• Higher temperature and increased rainfall will facilitate timber growth, possibly improving

productivity and reducing timber procurement costs.

Changes in rainfall and weather

patterns• Changes in forestation and timer procurement areas will increase timber procurement costs.

Increased severity of extreme

weather events

• Suspension of factory operations will reduce sales. Decreased forest resources will increase

timber procurement costs.

Oth

ers

Fluctuations in key product prices,

progress of next-generation

technology, changes in reputation

among investors, spread of

renewable and energy-saving

technologies

• Adoption of AI and IoT will reduce transport and factory operation costs.

• Increased trade of energy-saving products and high-efficiency insulating materials will increase

sales of timber and building materials for renewable-oriented markets.

Medium to

Large

Efforts to comply with government’s forest protection policy and timbering regulations, as well as changes

in forest resources caused by physical risks, will have great financial impacts.

Forest protection policy, and increase in forest fires and pests will have impacts

STEP2 “Assess materiality of climate-related risks” 4 52 3STEPTimber & Building

Materials

Housing and

Construction

64

Risk item Business impact on housing and construction Assessment

Tra

nsitio

nal risk

Carbon emissions

targets/policies• Governments’ forest carbon absorption policy will increase timber procurement costs.

Large

Forest protection policy • Governments’ adoption of timber tax and charges will increase timber procurement costs.

Construction policy

• Efforts to meet government’s policy will increase investment and reconstruction costs.

• If the government continues subsidies, monetary incentives will arise. Some policies can

impact market competition and sales.

Changes in reputation among

customers• If customers pay more attention to climate change, they will opt for forest certified timber,

which will increase procurement costs.

Phys

ical risk

Increased severity of extreme

weather events

• Severe natural disasters will cause delays in construction. This, together with recovery of

facilities, will increase construction costs.

• More extremely hot days will lower outdoor work efficiency, and cause delay in construction

and require more careful health management of workers. All this will increase costs.

Oth

ers

Energy-saving subsidies, changes

in energy mix, changes in

reputation among investors, fossil

fuel subsidies, rise in average

temperature, etc.

• Subsidies for PV power systems will increase monetary incentives.

• Accelerating divestment will be more unfavorable to companies not practicing environment

business.

• Changes in subsidies will change demand for renewable and other forms of energy, having impacts

on operation costs.

Small to

medium

Changes in government policies on forest protection and buildings, as well as severer weather events, will

increase additional costs and have great financial impacts.

Changes in sales caused by housing policy and delay in construction due to

extreme weather events will have impacts

STEP2 “Assess materiality of climate-related risks” 4 52 3STEPTimber & Building

Materials

Housing and

Construction

65

Source: Figure SPM.6 in the Synthesis Report (SYR) of the IPCC Fifth Assessment Report (AR5)

[Global average surface temperature (difference from the 1986-2005 average)]

(C)

2030

4C Scenario

2C Scenario

Consider society in 2030 with two scenarios of climate change that are highly uncertain.

Assess climate change risks and opportunities in the 2C and 4C scenarios

STEP3 “Identify and define range of scenario” 4C 2C4 5 ScenarioSTEP 2 3

The temperature will rise

0.9-2.3C above pre-

industrial levels, if strict

measures are taken.

The temperature will rise

3.2-5.4C above pre-

industrial levels, unless

more rigorous measures

are taken.

Further action in light of

global warming impacts

Preparation for possible changes in

forestation areas and materials (with an

eye to the latter half of the 21st century)

Governments’ deforestation prevention

regulations and policy will change supply

change, and raise forest management and

timbering costs.

66

Increased forest

fires and pests will

increase costs.

(region: xxx)

Increased fires and pests

will raise timber prices.

(region: xxx)

Flooding and soil drainage will

reduce timber supply and

raise timber prices. There will

be risk of suspension of

factory operations.

Action

Secure suppliers with an

eye to changes

in forestation areas

Prepare for disaster

prevention arising from

forest fire and flooding risks

(Work together with

suppliers)

No new entry

Action

Industry/Sumitomo

Forestry

Develop tougher products

Review supply chain

Accelerating shift to

alternative materials

Timber will be replaced by metals for building

structures (as a result of increased demand for

tougher materials)

Alternatives

Changes in material needs

in response to

extreme weather events

Frequent extreme weather

events will increase demand for

tougher building materials.

Changes in forestation areas

and materials will require the

Company to reconsider

suppliers and business partners.

Action

Understand buyers’ needs, and

procure materials and develop

products to meet the needs

Regulations

remaining at the

present level

(region: xxx)

The government will

introduce forest protection

regulations and policy to

achieve NDC target. They

may stipulate stricter

regulations

(region: xxx)

No regulations on forest

absorption in relation to

NDC. The government will

maintain the present level

of operators’ obligations to

return emission rights

when timbering under the

emissions trading scheme.

Action

Gather up-to-date

information about

government regulations

Secure transparence of

supply chains

Action Change business portfolio

(No particular

action needed)

Intensified

consumer

boycott NGOs will label logging as

vicious acts, pushing anti-

logging protests and consumer

boycotts

Other

stakeholders

Action

Promote dialogue with

NGOs and other

environmental groups

Participate in initiatives

Timber & building material industry

In the 4C scenario, global warming will increase forest fires and pests, and change

supply chains

STEP3 “Identify and define range of scenario” 4C 2CScenario4 52 3STEP

CustomerGovernment

Supplier New entry

World in the 2030s in the 4C scenario (example)

Timber & Building

Materials

Housing and

Construction

Preparation for possible changes in

forestation areas and materials

Securing of suppliers with an eye to

stricter regulations and inflated prices

Reduction in new housing starts due to

ageing society with lower birth rate

67

Stricter regulations

will increase

timber material costs.

Increased forest fires

and pests will

increase costs

Overall

Stricter regulations will

lead to higher timber tax

rates and reduced material

productions. This will

increase sales and

procurement costs.

(region: xxx)

Shift to slightly northern

areas of forestation, and

increased forest fires and

pests will raise timber

prices.

Timber & building material industry

Action

Secure suppliers with an eye

to higher timber tax rates

Prepare for disaster

prevention arising from

forest fires

Increased demand from biomass

power generation

New entries supplying biomass materials and

power generation

Action

Develop a network contributing to transport

cost reductions

and suitable for the local production for

local consumption model

More use of carbon-free

materials (including wood)Use of waste materials and new materials

(bioplastics, CNF, etc.) in preparation for reduced

supply

Higher environment

consciousness

More use of biomass

Changes in supply volume

will encourage development

of materials and new

approaches.


biomass fuel

Action

Increase the share and

secure domestic materials

Supply materials to biomass

power generation

Promote forest certification

and forestation

Much stricter

government

regulations

Overall

Stricter regulations on

natural forest logging

Spread of the idea of “Net

Zero Deforestation”

(Region: xxx)

The government will set

stricter forest protection

regulations and policy

against logging with the

target deforestation rate

under 350h/year.

ActionGather up-to-date

information about

government regulations

Secure transparence of

supply chain

Action Develop new materials and approaches

Changes in

investment and

financing Investors and financial

institutions will change their

stance in accordance with the

quality of forest management

(reforestation, etc.).

Action Promote forest

certificates and forestation


Action Promptly secure promising regions

(resilient regions, etc.)

In the 2C scenario, stricter forest regulations and increased forest fires will have

impacts

STEP3 “Identify and define range of scenario”

Industry/Sumitomo Forestry

Alternatives

Customer Government

Other

stakeholders

Supplier New entry

4C 2CScenario4 52 3STEPTimber & Building

Materials

Housing and

Construction


68

Increased forest

fires will increase

material costs. Risks of natural

disasters will increase

material costs.

Procurement of tougher

materials and timber

against natural disasters.

Action

Establish supply chain

considering physical risk

Supplier

Inflated grid

power rates

Grid power rates will increase.

Use of heat as renewable

energy

Action

Secure non-utility power

sources

Energy

business

Rise in new entries

IT businesses and electronics retail stores will

enter the renovation market.

New entry


Continued efforts for BCP

and spread of ZEH

Technology development for BCP, energy-saving

housing, and HEMS

ZEH will increase, but not among large

residential houses

Longer construction schedules

Action

Industry/

Sumitomo Forestry

Steadily promote energy-

saving and ZEH

No alternatives will emerge.Alternatives


More efforts for BCP

Continued efforts

for ZEH

Possibly more frequent extreme

weather events and slope

failures will increase demand for

tougher, more resilient

housing.

Global warming will slightly

increase air-conditioning

demand and costs, and slightly

decrease heating demand and

costs. If the cooling trend

prevails, demand for and costs

of heating will increase.

Demand for energy-saving and

heat-resistant housing will

slightly increase.

Customer

Action

Continue promoting ZEH

Develop highly resilient

housing

Continued efforts

for net “zero

energy houses” (ZEH)

Increased subsidies for

BCP

The government will promote

energy-saving houses, and

visual control of renewable

energy and home energy

management systems, HEMS,

(through subsidies).

The government will

encourage the industry to

realize ZEH targets (50% of

new houses by 2020, and

more widespread by 2030).

Efforts for carbon pricing will

not bear fruit.

Action

Government

Gather up-to-date

information about

government policy and

secure subsidies

In the 4C scenario, the world will be on an extension of the present path (The landscape of the

housing and construction industry will remain unchanged. The focus will be on BCP.)


Housing and construction

industry


Materials

Housing and

Construction

Housing and

construction industry


69

Inflated timber prices

Forestry regulations

(timber tax, etc.) will raise

timber prices.

Risks of natural disasters

will increase material

costs.

ActionEstablish supply chains

that can manage natural

disaster risk.

Consider supply chains with

an eye to stricter regulations

Promptly secure necessary

parts for ZEH

Supplier

More use of

renewable energy

Increased share of

renewable energy

Creation of FIT-free and

aggregated business

ActionSecure non-utility power

sources and supply from

other companies

Energy

business

Rise in new entries

Electronics, automobile and IT makers,

particularly those with energy-saving and

energy storage technology will enter the market.


high-function housing

Reduction in new housing starts due to

ageing society with lower birth rate

Longer construction schedules

Development of advanced ZEH, efforts

for lower pricing

Action

Industry/

Sumitomo Forestry

Develop and apply advanced ZEH and

low-price ZEH technologies


new materials Inflated prices of steel, cement and other

materials will increase demand for bioplastics,

CNF and other new materials.

Alternatives

More sophisticated

(high-function)

ZEN at lower costs

The ZEH market will get

mature and the demand

will be polarized (to

inexpensive housing and

more sophisticated

housing).

Higher interest in lower

power rates will increase the

demand for housing with

higher energy efficiency.


certificated housing for “fair

forestry” and net zero

deforestation.

Customer

Action

More focus on lower-price

housing

More focus on advantageous

field (wooden housing)

Promotion of lower-

carbon policy

for households

The government will set

stricter targets than NDC,

and adopt stricter

building and housing

regulations (including

ZEH) and subsidies.

Policy to use surplus power

for wider use of PV power

generation

Promotion of electrification

for lower carbon in the

household sector

(depending on the progress

of “Power to Gas”

technology)

Action

Government

Work with the government

for the spread of advanced

ZEH,

Adopt renewable energy,

and deal with carbon tax to

create emission rights

ActionDevelop new low-carbon (wooden)

materials

Action Business partnerships and M&A

New entry


In the 2C scenario, the Company will have to find business solutions to increased demand for

lower-carbon housing


Materials

Housing and

Construction

Shift to slightly northern

areas of forestation will

increase procurement costs.

Increased forest fires

and pests will increase

procurement costs.

Longer growths period can

increase timber supply.

Floods will reduce timber

supply, can possibly

cause factories to stop

operations.

Troubles with transport

routes due to extreme

weather events

The government will maintain or possibly

enhance timber tax rates and regulations on

emission rights in relation to logging.

Protect forests against


Government

Technology development for BCP,

energy-saving housing, and HEMS

Consumers will have slightly higher interest in energy-

saving housing, use of renewables, and purchase of

ZEH to cut electricity bills.

Global warming will slightly increase air-conditioning

costs, and slightly decrease heating costs. Extreme

weather events will increase heating costs.

Increased demand for energy-saving and heat-

insulating housing.

Promotion of energy-saving,

renewables, and energy

storage for housing

Increased demand for tougher

construction materials

Expansion of sharing economy

Further urban concentration of

population

Timber and building materials Housing and construction

Government initiatives will increase energy-saving housing (ZEH), while there will be risk that

more forest fires and pests make it difficult to procure timber and construction materials

(Reference) Image of a future society in the 4C scenario 4C 2CScenario4 52 3STEP

(Region: xxx)

(Region: xxx)

70

The government will promote energy-saving houses,

and visual control of renewable energy and HEMS.

The government will encourage the industry to realize

ZEH targets.

Government

Slightly increased forest

fires and pests will slightly

increase procurement costs

in some regions.

A longer growth periods

will increase timber supply in

some southwestern regions.

Higher timber tax rates

will increase procurement

costs.

Stricter (natural) forest regulations

Possible higher timber tax rates and

suspension of exports

Spread of the notion “Net Zero Deforestation”

Increased efforts for emission rights

Stricter regulations and policy

to protect forest resources

Government

The government will set stricter construction and housing

regulations than NDC, and enhance subsidies.

Promotion of electrification for lower carbon in the household

sector, as well as carbon tax and emissions trading

Further promotion of low-carbon policy

for households

Assistance to technology development

Government

Use of waste materials and

development of new materials

with an eye to reduced supply

New entries from the housing

and material industries

Timber and building materials Housing and construction

Entries of biomass material

suppliers and generators

Promotion of local production for local

consumption and domestic timber

materials with an eye to higher LCA

Demand will increase for higher energy-

efficiency housing.

Electronics, automobile and IT makers

with energy storage and supply

technology will enter the market. Active

business operations using surplus power

from PV power generation

Promotion of advanced ZEH and lower

pricing

Government initiatives will lead to higher maturity of the ZEH market. They will also facilitate development of advanced ZEH and

lower pricing, and increase new entries from other industries. There will also be risk that stricter forest regulations and increased

fires make it difficult to procure timber and construction materials.

(Reference) Image of a future society in the 2C scenario 4C 2CScenario4 52 3STEP

(region: xxx)

(region: xxx)

71

Present2030

Sources4C 2C

Carbon

emissions

targets/policies

Government targets

Indonesia deforestation

325ha (the 2030 target)450ha (assumed) 300ha (assumed) Indonesia NDC

Regulations on logging in

natural forestsNone

Country targets

(20-100%)(Assumptions)

Forest protection

policy

Forest protection policy

(likely to be timber tax)(Malaysia: $12/m3) (n.a.: unpredictable) (n.a.: unpredictable) (to be considered)

Building policy ZEH targets

New housing starts starts (present level)Starts

(opportunity loss of xx%)(Assumptions)

Share of ZEH ZEH: xxx%

xxx%,

Advanced ZEH:

xxx%(Assumptions)

Subsidies for

renewables, etc. Subsidy amount

Share of biomass

power generation

Energy mix in Japan

1.7%3.7% 4.6%

Agency for Natural Resources

and Energy, “Challenges to

the 2030 Energy Mix - Overall

Picture”Changes in

energy mix

Rise in average

temperatures

Changes in vegetation

and increase in fires

Forest fire area

0.951%/year

(Canada)1.594%/year 1.690%/year

Natural Resources Canada

Forest Change indicators ”Fire

regime”

(RCP2.6, RCP8.5)

Increase in forest pests (n.a.: data unavailable) (n.a.: unpredictable) (n.a.: unpredictable) (to be considered)

Changes in

rainfall and

weather patterns

Flooding risk$405m/year

(Indonesia) $875m/year $405m/yearWRI "The Aqueduct Global

Flood analyzer"

Severer extreme

weather event

Frequency of torrential

rains

Event probability: 0.3

times/year

(Japan)

0.6 times/year

(around 2100)(n.a.: data unavailable)

Ministry of the Environment,

“Synthesis Report on

Observations, Projections and

Impact Assessments of

Climate Change, 2018”

1

Define the world in selected scenarios based on IEA and other scientific grounds

STEP3 “Identify and define range of scenario” 2C4 52 3 ScenarioSTEP 4C

72

73

Scientific forecasts Recognition of forestry companies

[Key indicator: Annual area burned]

A rise in temperatures will increase the number of large fires, having great impacts

both in the 2C and 4C scenarios.

Companies

citedComments (extracts)

STORAENSO

UPM

Higher risks of forest fires: Not yet occurred

in northwestern Russia, where the company

procures materials, but possible future risks

(UPM)

Brambles

Impacts of unforeseeable cyclones, fires,

earthquakes and other natural disasters

(Brambles)

Forest fire risk recognition among worldwide companies

STORAENSO: A forest products company providing products in

over 30 countries worldwide. A leading company in the global

market

UPM: A forest industry company having production plants in 13

countries, strong in business fields combining bioenergy and

forestry industries

Brambles: A supply-chain logistics company doing business in

over 60 countries worldwide

2℃

Annual area burned (qualitative)

Present Central part of the continent

2030Large forest fires

centrally

2050Forest fires also in

the northwest

Source: Natural Resources Canada, “Forest Change Indicators, Fire Regime

RCP 2.6 scenario”

World leading forest companies recognize that

climate change is causing more forest fires.

4 52 3STEP

Annual area burned by large fires in Canada

Annual area burned by large fires (Area burned/year)

Source: CDP response

CDP response on climate change risks

1

0.951% 1.594%

~1.690

Present 2030 2050

4C 1.873%

~3.045%

Timber & Building

Materials

Housing and

Construction

Business impactEvaluation

(100 million yen)

2030

with no action

Higher timber prices due to forest

protectionXX

Opportunity loss due to failure to develop

high-function ZEHXX

Higher timber prices due to forest fires XX

Higher costs due to heavy rains XX

Subtotal ▲ XX

2030

with actions

taken

Securing timber suppliers with an eye to

forest protectionXX

Opportunities through development of

ZEH and high-function ZEHXX

Increase in demand for biomass power

generationXX

Efforts to prevent forest fires XX

Total ＋XX

74

4C scenario

• Forest protection and building

(ZEH) regulations will remain at

the present level.

• Annual area burned by large

fires will be 1.594%. (Area

burned/year)

• Increased torrential rains will

prolong construction schedules

and increase costs.

• The penetration rate of biomass

power generation is assumed

to be 3.7% in Japan.

In the 4C scenario, the Company must eliminate financial impacts of forest

fires

STEP4 “Evaluate business impacts” 4 52 3STEP 2CScenario 4C

75

In the 2C scenario, the Company must eliminate financial impacts of stricter

regulations (forest and ZEH) and forest fires

STEP4 “Evaluate business impacts” 4 52 3STEP 2CScenario 4C

2C scenario

• Timber costs will sharply increase

on the assumption that the

governments of countries

enhance forest protection policies

and restrict exports of timber from

natural forests. (The percentage

of restricted imports was

calculated based on the share of

natural forest in each country. The

inflated timber costs will not be

passed onto timber prices.)

• Opportunity loss due to failure to

develop high-function ZEH

• Annual area burned by large fires

will be 1.690%. (Area

burned/year)

• The penetration rate of biomass

power generation is assumed to

be 4.6% in Japan.

• It is also assumed that the

Company will complete a change

of timber suppliers as a forest fire

prevention measure.

Business impactEvaluation

(100 million yen)

2030

with no action

Higher timber prices due to forest

protectionXX

Opportunity loss due to failure to develop

high-function ZEHXX

Higher ZEH costs XX

Higher timber prices due to forest fires XX

Higher costs due to heavy rains XX

Subtotal ▲ XX

2030

with actions

taken

Securing timber suppliers with an eye to

forest protectionXX

Opportunities through development of

ZEH and high-function ZEHXX

Increase in demand for biomass power

generationXX

Efforts to prevent forest fires XX

Total ＋XX

76








Target business segments and years of the climate-related risk assessment

Consider urban development and resort (resort hotels, golf courses, and ski areas)

business segments

Business segment Target year Grounds

Urban

development2030

This is one of the Company’s leading segments.

The purpose is to consider action to be taken in

the mid-term timeframe from the scenario

analysis perspective.

Resort business

(resort hotels,

golf courses,

and ski areas)

2050

The purpose is to consider physical risk impacts

and possible countermeasures to be taken.

These impacts will differ in magnitude in the long

run.

Target business segments and years

77

Assess materiality of climate-related risks

Various factors related to climate change will impact the Company’ business


Politics Economy Society Technology

Transition

Risks

(Stricter

regulations,

etc.)

• Carbon pricingAdoption of carbon tax will

incur costs for CO2 emissions.

• Carbon emissions

targets/policiesExpanded coverage of energy-

saving laws, enhanced targets

of cap and trade programs,

and mandatory installation of

energy-saving functions will

increase technology and

facility installation costs.

• ZEB regulationsApplication of ZEB regulations

to buildings will increase

construction and repair costs.

• Energy prices

Increased use of renewable

energy and inflated fossil fuel

prices will lead to less stable grid

systems and increase energy

prices.

• Trends in energy demand

Fluctuating demand for energy as

a whole will impact energy

procurement costs.

• Changes in energy mix

Changes in the share of

renewable energy will change

emission reductions companies

need to make.

• Changes in

consumer behaviorsIncreased needs for (i) disaster-

resilient and (ii) “green” buildings

• Changes in

reputation among

consumers and investorsAny delay to meet the needs for

(i) disaster-resilient and (ii)

“green” buildings can result in

consumer boycott and withdrawal

of investors.

• Progress of

ZEB technologyRise in advanced materials and

technologies will reduce ZEB

construction and repair costs.

• Spread of energy-

saving and

renewable technologyProgress towards a low-carbon

society will facilitate

development of energy-saving

and renewable technology, and

reduce adoption costs.

Physical

Risks

(climate

change, etc.)

• Higher average temperatures and sea levelsA rise in average temperatures will cause more heatstroke. It will also lead to more use of air-conditioning, which will increase operation

costs.

• Severer extreme weather events (wind and flood damage)More frequent typhoons and torrential rains will cause more wind and flood damage to buildings, increase repair costs, and reduce

customers.

Great

impact

Great

impact

Great

impact

Great

impact

Great

impact

Great

impact

Great

impact

Great

impact

Great

impact

78

(Reference) Image of a future society in the 4C scenario

Extreme weather events will be more frequent and shifts to a low-carbon society and

renewable energy will not progress.

Urban

Government

Low-carbon and remote work policy will

basically remain at the present level.

Competition for land acquisition,

disaster preparedness, and

enhanced facilities will increase

development costs.

Properties vulnerable to flood

risks will be low rated.

Fossil fuels

Failure to adopt renewable

energy will result in large

CO2 emissions.

Investor/customer

Whether companies have BCP or

not will be a key factor for

investors and customers.

Heavy rains will cause

sediment disasters.

Climate change will lead to

lower revenues at ski

resorts.

Resort

Climate change will

increase operating costs.


Brown

electricity

CO2

CO2CO2Active policy and

adoption of BCP

Disaster preparedness

will increase repair costs.

Customers

Increased extreme weather

events will reduce the

number of visitors.

More employees will

wish to work indoors.

79

Business impacts in the 4C scenario

Interpret that changes in the environment in the future will have impacts on

business to some extentChanges in social environment

Events likely to occur in future

Adverse business impactsInterpretation of actual business impacts

Positive business impactsInterpretation of actual business impacts

De

ve

lop

me

nt

bu

sin

es

s

Enhanced environment regulations

including ZEB and energy-saving

laws

Adoption of energy-saving, renewable and

ZEB for legal complianceSteady efforts for compliance

Increased extreme weather eventsIncreased damage to buildings

Loss of customers due to insufficient BCP

Enhanced resilience of buildings and

more active customer promotionBCP-oriented customer preference

and transfer of properties

Higher vacancy rate due to increased

remote work

Loss of customers due to increased remote

workIncrease in satellite offices

Re

so

rt

bu

sin

es

s

Lower revenues at ski resorts due to

climate changeShorter business hours at ski resorts Adoption of advanced snow machines

Decrease in customers/visitors as

they avoid the outdoors due to

increased extreme weather events

Lower revenues due to customers’

avoidance of outdoor activities and shift to

alternative recreation

Creation of new business opportunities

leveraging existing assets

Torrential rains and sediment

disasters

Increased workload due to climate

change

Increased loss due to sediment disasters

Efforts and promotion for heatstroke

measures and BCP

Increased labor costs for emergency

actions

Increased procurement and air-

conditioning costs due to climate

change

Increased air-conditioning and operating

costs due to higher temperatures

Increased food material costs due to higher

temperatures

2030

2050


80

(Reference) Image of a future society in the 2C scenario

Extreme weather events will be less frequent than in the 4C scenario, and adoption of ZEB

and renewable energy will progress

Urban

Resort

Government

(i) Stricter low-carbon regulations

(ii) Carbon tax

(iii) Subsidies for renewable energy

(iv) Promotion of remote work

Carbon tax will increase

material costs.

Disaster preparedness

will increase repair costs.

Adoption of renewable energy

and ZEB with various

procurement means

Investor/customer

(i) Green building will be a key factor for

investors’ and customer’s decision-making

(ii) Spread of remote work will change

criteria for customers for housing

rent/purchase.

CCS

technology

Green energyZEB Green energy

Possible entry of companies

with advanced technology

New entry

New

entry

Torrential rains and

sediment disastersClimate change will

reduce revenues at

ski resorts.

More employees will

wish to work indoors.


Energy-saving and

renewables will

reduce costs.

ZEB ZEB

ZEB

CCS thermal power

plant as the main

power source

Green energyEnergy-saving and

renewables will

reduce costs.

Climate change will

increase operating

costs.

Customer

Increased extreme weather

events will reduce the

number of visitors.

81

Brown

electricity

Business impacts in the 2C scenario

Interpret that Stricter laws and regulations in the future will have impacts on

business to some extent

Changes in social environmentEvents likely to occur in future

Adverse business impactsInterpretation of actual business impacts

Positive business impactsInterpretation of actual business impacts

Urb

an

de

ve

lop

me

nt

bu

sin

es

s

Adoption of carbon taxIncreased construction costs including ZEB

adoption costsSteady efforts for compliance


including ZEB and energy-saving

laws

Adoption of energy-saving, renewable and

ZEB for legal compliance

Reduced costs thanks to ZEB technology

development

Stricter cap and trade programsIncreased costs of green electricity

certificates

Reduced costs thanks to renewable

technology development

BCP-oriented customer preference

and transfer of properties

Increased damage to buildings

Loss of customers due to insufficient BCP

Improved competitiveness of resilient

buildings

Re

so

rt

bu

sin

es

s


including energy-saving lawsIncreased costs of saving-energy adoption

Adoption of renewable and other non-

utility electricity

Lower revenues at ski resorts due to

climate changeShorter business hours at ski resorts Adoption of advanced snow machines

Decrease in customers/visitor as they

avoid outdoors due to increased


Lower revenues due to customers’

avoidance of outdoor activities and shift to

alternative recreation

Creation of new business opportunities

leveraging existing assets

Increased procurement and air-

conditioning costs due to climate

change

Increased air-conditioning and operating

costs due to higher temperaturesEfforts and promotion for heatstroke

measures and BCPIncreased food material costs due to higher

temperatures

4 52 3 ScenarioSTEP

2030

4C 2C

2050

82

3. Publicly Available Scenario Analysis

Chapter 3. Publicly Available Scenario Analysis

This chapter presents corporate efforts for scenario analysis in

accordance with the steps recommended by the TCFD recommendations.

83

Sector by TCFD

definitionCompany Country

Energy

Royal Dutch Shell Netherlands

INPEX Japan

Mitsubishi Corporation Japan

Materials

(Metals & Mining )

BHP Australia

Glencore Switzerland

Transportation

JetBlue United States

Aurizon Australia

TOYOTA MOTOR Japan

Foods/Consumer Staples Unilever United Kingdom

[Examples of Scenario Analysis]

Not many case studies of scenario analysis are available. This chapter will present

selected publicly available scenario analysis

At present, companies listed below have undertaken scenario analysis. Among Japanese

companies, INPEX, Mitsubishi Corporation and Toyota Motor are on the list.

1

2

3

4

5

6

7

8

Sources: websites, annual reports, and sustainability reports of the companies concerned

84

9

Royal Dutch Shell scenario analysis

[Royal Dutch Shell (Energy) (1/2)]

The Company sets three scenarios incorporating government policy of different levels.

In FY2017, the Company adopted a new scenario “Sky”, “Well below 2C - The Paris

ambition”

Scenario

Mountains

Governments around the world steadily and gently promote political and

economic reforms.

Oceans

Markets and citizens gain more initiatives, and changes take place at varied

paces depending on the speed of deregulation.

Sky

The scenario complies with the target “below 2℃” of the Paris Agreement. It

assumes that carbon emissions from the energy sector will be net-zero by the

target year 2070.

Features

Extensive report on scenario analysis comprised 96 pages. Reference to

the TCFD recommendations

In 2013, Shell published its original scenario “New Lens”, a pioneering

scenario work.

The report features comments from CEO/Head of Shell Scenarios on the

importance of scenarios.

The scenarios originally developed were praised by the Massachusetts

Institute of Technology (MIT).

The report makes the most of scenarios and analyzes climate-related

impacts on the world and the industry.

Source: Royal Dutch Shell, “Shell Scenarios Sky” 2C Scenario

1

85

4 52 3STEP

The future world in 2070 in the Sky scenario

Royal Dutch Shell scenario analysis

[Royal Dutch Shell (Energy) (2/2)]

The Company analyses the future world in 2070 and clarifies concerns that could arise when

comparing to the present situation.

A change in consumer mindset means that people preferentially

choose low-carbon, high-efficiency options to meet their energy

service needs.

A step-change in the efficiency of energy use leads to gains above

historical trends.

Carbon-pricing mechanisms are adopted by governments globally

over the 2020s, leading to a meaningful cost of CO2 embedded

within consumer goods and services.

The rate of electrification of final energy more than triples, with

global electricity generation reaching a level nearly five times

today’s level.

New energy sources grow up to fifty-fold, with primary energy from

renewables eclipsing fossil fuels in the 2050s.

Some 10,000 large carbon capture and storage (CCS) facilities are

built, compared to fewer than 50 operating in 2020.

Net-zero deforestation is achieved. In addition, reforesting an area

the size of Brazil offers the possibility of limiting warming to 1.5℃.

Challenges for a 21st century scenario

Energy demand is rising

Efficiency can have unexpected consequences

Coal remains popular

Some parts of the energy system are “stubborn”

Some technologies are “stalled”

Systems transformations are unpredictable and take time

Given the time frame of 2070, there can be no slippage

Source: Royal Dutch Shell, “Shell Scenarios Sky”

1

86

4 52 3STEP

Vision 2040

Increase our corporate value by conducting

operations flexibly

Create a global gas value chain

Aim for renewable energy projects to account

for 10% of its project portfolio in the long term

Develop technology for the practical

application of CCS

The Company sets four climate-change scenarios consisting of IEA’s and its own scenarios.

[INPEX (Energy) (1/2)]

The Company sets four climate-change scenarios based on

two key factors, “policy” and “technology”.

Source: INPEX Corporation, “Sustainability Report 2018”, August 2018.

The INPEX Low-carbon Society Scenarios

Low-carbon Transition Plan Based on Scenario Analysis

2

87

4 52 3STEP

Scenario (to 2040) Enhanced policy level Technological progress level

IEA New Policies

Scenario

Preserving actual NDC

trends after 2025

Level of actual NDC plus announced technological progress in

each country

Technology

progress scenario

Preserving actual NDC

trends after 2025

Technology of solar, wind and EVs will progress more than those

of the IEA New Policies Scenario due to decreasing the cost

Wake-up scenarioStrengthen NDCs greatly

enhanced by 2025

Technological progress level : Same as IEA New Policies

Scenario through 2025; thereafter the 2C scenario level

2C scenarioStrengthen NDCs greatly

enhanced by 2020

Energy efficiency improvements and CCS largely contribute to

emissions reduction in addition to expansion of solar and wind

power, and EVs according to technology development

Medium-term Business Plan 2018–2022

Reduce production costs to $5/bbl (excluding

royalties) for oil and natural gas upstream

businesses

Maintain financial and corporate resilience even if

the crude oil price drop to US$50/bbl

Promote development of natural gas, enhance

renewable energy initiatives

Manage emissions from operations

Status of Climate Change Risks and Opportunities: Assessment Coverage Plus Management/Initiatives

[INPEX (Energy) (2/2)]

The Company evaluates medium and long term transition risks and physical risks

Source: INPEX Corporation, “Sustainability Report 2018”, August 2018.

2

88

4 52 3STEP

Risk/opportunity

categoryRisks and opportunities covered Management/initiatives status

Transition risks

Medium-

term

(to 2022)

• Reputation risks related to absolute emissions and emissions

intensity

• Increased stakeholder concerns against the industry regarding

carbon budgets and emissions reductions

• Disclosures regarded as inadequate

• Proper control of emissions from operations

• Setting of management targets for company-wide emissions

• Disclose climate risk exposure in line with TCFD recommendations

• Introducing a carbon pricing policy in project countries results in

higher financial costs

• Carbon pricing policy trends are monitored

• Sensitivity analysis being conducted on internal carbon prices

• Practical use of CCS technology being strengthened

Long-

term

(to 2040)

• A continuing business environment with potential decreased oil

demand as climate policies are enhanced in each country• Analyzing scenarios in policy, technology, and market trends

• Develop and expand natural gas

• Strengthen initiatives on renewable energy

• Reducing production costs in upstream oil and natural gas

businesses

• Maintaining a framework enabling stable operations even if oil

prices stay at $50/bbl

• A continuing business environment with potential decreased oil

demand due to technological progress in renewables, EVs, etc.

• Development is difficult for oil/gas projects with high production

costs due to changes in energy choices in the market, resulting in

long term demand and pricing impacts

Physical risksLong term

(to 2040)

• Project operations impacted by increase in abnormal events

relating to climate risks

• Ichthys LNG Project: Impact of large tropical cyclones on the design

of offshore facilities and of rising sea levels on the placement of

terrestrial facilities

• Erecting a company-wide framework for assessing and

managing physical risks

• Project operations are impacted by increasing average

temperatures, changing precipitation patterns, and rising sea levels

Opportunities

Medium-

term

(to 2022)

• Develop and adopt low-carbon products and services

• Develop and expand natural gas

• Strengthen renewable energy projects

• Build a company-wide framework for assessing and managing

opportunities

Long-

term

(to 2040)

• Develop and adopt low-carbon products and services

• Develop new products and services through R&D and technology

innovation

• Put 10% of project portfolio into renewable energy projects

• Develop technology for practical application of CCS

• Continue R&D in renewable energy technologies including

storage batteries, artificial photosynthesis, and methane reuse

using microorganisms

[Mitsubishi Corporation (Trading Company) (1/3)]

The Company discloses its climate-change risk and opportunity assessment process

Source: Mitsubishi Corporation, “ESG Data Book 2018”

3

89

2 3STEP

Disclosure of the scenario analysis process

The report provides the definition of scenarios used for scenario analysis and the

process of assessing climate-related risks that have business impacts.

4 5

© 2019. For information, contact Deloitte Tohmatsu Consulting LLC.


The Company discloses the process of assessing transition

opportunities and risks, and physical risks


3

90

STEP 542 3



The Company discloses business impacts and potential responses

in detail under the NDC 2C scenario.


3

91

Disclosure of scenario analysis in

detail

The report provides global demand

trajectory and trends for power generation

and related businesses, natural gas and

LNG, thermal coal, and coking coal at five

levels (substantial increase, increase,

unchanged, decrease, and substantial

decrease) in various scenarios.

Evaluation of business impacts

4 52 3STEP

NDC Scenario 2℃ Scenario

Identification of Potential

responses


[BHB Billiton (Materials) (1/3)]

The Company has developed four scenarios in terms of the levels of cooperation and

technology available at each country. It also adopts a Global Accord scenario towards a 2C

target.

Featu

res

Scen

ari

os

The Company reports on scenario analysis and refers to the TCFD

recommendations.

The report covers various events under four scenarios including

the 2C scenario (Global Accord) recommended by the TCFD

recommendations.

The report assumes a scenario where shock events will prompt a

rapid transition to a largely decarbonized world in accordance with

Global Accord scenario.

The report concludes that strict environment regulations and

emission costs will impact their commodities, but that BHP

Billiton’s scenario remains attractive.

A New Gear: Innovation delivers step-change growth in developed

economies

Closed Doors: National self-interest drives economic policy leading

to low growth

Global Accord: High cooperation and commitment to limit emissions

will facilitate technology development. There is a transition to a 2C

world

Two Giants: U.S. and China-led hubs drive technology-enabled

growth

2C ScenarioSource: BHP Billiton, “Portfolio Analysis 2015”

4

Features of scenario analysis, and scenarios used

92

4 52 3STEP

Global Accord- Impacts on Long-term Demand


The Company analyzes possible impacts on commodity

demand during transition to a 2C world

Approach

Identify critical uncertainties impacting demand for the

Company’s commodities in a 2C scenario. (Table 2)

Construct a central case, where what the Company

expects will happen, and analyze the commodities long-

term demand under the Global Accord scenario and with

the application of shock events. (Figure 6)

The Company forecasts growth in long-term demand for

most of their commodities in the Global Accord scenario

and shock event scenarios.

Growth will be at a slower pace than in the central case.

The Company forecasts the share of renewable energy

in the power mix to increase by almost 25 per cent in the

Global Accord scenario compared with the central case.

In transport, several trends intensify, including

improvements in the fuel economies of new vehicles

and the rise in electric vehicles. As a result, energy coal

and crude oil are likely to be the most affected in the

Global Accord scenario and shock event scenarios.

In the Global Accord and shock event scenarios, the

power and machinery sectors are impacted by tighter

environmental constraints and emissions costs.

Results

Central case

Global Accord

Source: BHP Billiton, “Climate Change: Portfolio Analysis”

4

93

4 52 3STEP

Global Accord - Earnings


Due to portfolio diversification, the Company forecasts that the EBITDA and margins will not

be impacted significantly in the scenarios used

Global Accord - EBITDA margin and commodity

supply

Results

The EBITDA margins will not be impacted significantly both in the

Global Accord and the shock event scenarios.

The Company forecasts that commodities affecting climate change

will reduce their proportions in the portfolio, and others will

increase their proportions, both in the Global Accord and the shock

event scenarios in comparison to central case.

Approach

The Company analyzes how EBITDA grows in FY2030 relative to

FY2016 in the central case (benchmark for business planning),

under the Global Accord scenario and the shock event scenario.

(Figure 7)

Results

The EBITDA is expected to double relative to FY2016 both in the

Global Accord and the shock event scenarios.

In the Global Accord scenario, the Company anticipates the impact

on the current portfolio value will be minimal. This is due to portfolio

diversification and diminishing contribution of fossil fuels as a

proportion of portfolio value over time, in comparison with other

commodities.

Source: BHP Billiton, “Climate Change: Portfolio Analysis”

4

94

4 52 3STEP

[Glencore (Materials) (1/2)]

The Company makes climate change considerations with three scenarios

invented based on IEA’s New Policies Scenario in WEO 2016 and the 450 scenario

450ppm Scenario (consistent with achieving 2C climate change goal)

Carbon prices: US $75 to US $100 per tonne CO2e by 2030, rising to a range of US $125 to US $140 by

2040 per tonne CO2e

Domestic efforts: Globally coordinated efforts to reduce emissions accelerated beyond the implementation of

existing NDCs. Universal adoption of carbon pricing

Technology: Rapid development of break-through technologies and investment in renewable energy and CCS

New policy Scenario, including timely and full implementation of NDCs

Carbon prices: US $10 to US $40 per tonne CO2e by 2030, rising to a range of US $20 to US $50 by 2040

per tonne CO2e

Domestic efforts: Key countries make efforts to reduce emissions with focused NDC implementation.

Technology: Moderate growth of renewables and increasing use of high-efficiency technologies. Enhanced

energy efficiency and consumption improvements in developed and developing countries

Based on IEA’s New Policies Scenario (4C) with outcomes reflective of 5-10 year delays

Carbon prices: US $5 to US $25 per tonne CO2e by 2030, rising to a range of US $10 to US $40 by 2040

per tonne CO2e

Domestic efforts: Many countries do not meet their stated targets or objectives.

Technology: Fossil fuels continue to be the primary base for electricity generation, especially in Asia with

slower introduction of low-carbon technologies.

(i) Delayed Action (Glencore Central Scenario)

(ii) Committed Action

(iii) Ambitious Action

Source: Glencore, “Climate Change Considerations for Our Business 2017”

5

95

4 52 3STEP

[Glencore (Materials) (2/2)]

Under (ii) the committed action scenario, where NDCs are implemented

without delay, the Company’s business units remain a positive investment outlook, with the

exception of ferroalloys and oils (which account for 5% of the total EBITDA).

Marketing attractiveness is robust and demand growth improves as climate

action is globally coordinated driving electrification of energy and transport

systems,. (…)

Marketing and trading margins not impacted by climate initiatives. Remains

core to Glencore’s business model and differentiates Glencore from its peers.

Demand growth for Zinc based on anti-corrosive properties and use as an

alloy to form materials that are used in automobiles, (…) will be supported by

ongoing electrification, industrialization and urbanization.

Seaborne traded coal differentiated (…) as ongoing investment in low cost coal

cased power generation across south east Asia supports seaborne demand.

Glencore’s competitive portfolio continues to generate acceptable returns

The high cost of carbon assumed under the (3) Ambitious Action Scenario

would potentially lead to the closure of some of South Africa’s marginal

ferrochrome producers, resulting in major job losses.

Marketing attractiveness is robust and demand growth improves as climate

action is globally coordinated driving electrification of energy and transport

systems. (…)

Agriculture maintains positive investment attractiveness under each of

Glencore’s scenarios.

Oil has a neutral attractiveness under each of Glencore’s scenarios. We will

continue to monitor any increase in carbon prices that may provide a driver

from investment into reduction options to reduce our overall risk to the business.

Business Unit

EBITDAScenario Outlook Impact under Ambitious Action Scenario

Copper

Marketing

Zine

Seaborne

Coal

Nickel

Ferroalloys

Agriculture

Oil

Source: Glencore, “Climate Change Considerations for Our Business 2017”

5

96

4 52 3STEP

[jetBlue (Transportation) (1/2)]

The Company analyzes impacts of climate-change risks and

opportunities using a 2C scenario as part of enterprise risk management (ERM)

Corporate profile: jetBlue Airways CorporationA U.S. low-cost airline headquartered in New York City and the sixth-largest airline in the U.S. JetBlue Airways operates

some 1,000 flights daily and serves over 100 domestic and international destinations in 17 countries including the Caribbean,

Central America and South America.

Purpose of the report:The report is designed to provide stakeholders with information about the Company’s environmental, social, and governance

(ESG) performance that helps them understand the issues and trends affecting the Company’s business and how they

prepare for them. It also aims to disclose information in line with the SASB and TCFD.

Identify risks to

the Company

Why the Company is resilient (examples)

• In 2017, three large hurricanes resulted in more than 2,500 cancelled flights and disrupted

normal operations for 30 consecutive days. Property damage was estimated at more than

$200 billion, the costliest on record.

• Despite the disruption caused by the multiple hurricanes, only 1.4% of the Company’s

available seat miles were cancelled in 2017 as a result of these events.

• Even a major hurricane is typically a short-term localized event. The Company was able to

mitigate revenue loss from cancelled flights by redeploying flights to other destinations,

which were not hit by extreme weather events.

• Due to more accurate hurricane forecasting models, the Company is able to move planes

out of storm paths earlier than in the past.

Transition Risks

Policy &

Legal

Higher fuel and/or carbon prices

Additional emissions-reporting obligations

Mandates on and regulation of existing products and services

Technology Cost to transition to lower-emissions technology

Substitute lower-emission options from existing products and services

Market Increased concerns of stakeholders around lower carbon service offerings

Increased cost of materials

Reputation Shifts in consumer preferences between brands and/or modes of transportation for tourism destinations

Stigmatization of sector

Increased stakeholder concern or negative stakeholder feedback

Physical Risks

AcuteMore frequent and severe weather events (e.g., hurricanes and snow storms) leading to business interruption and damage across operations and supply chains

ChronicLong-term shifts in climate patters, possibly resulting in new storm patterns, coastal flooding, and chronic heat waves that potentially affect airports

The report gives accounts of ESG risks and specific cases (including a hurricane’s devastating impact). The report also explains the

management of and resilience to risks and the reasons in the SASB or TCFD framework.

The Company started scenario analysis in FY2017 and expresses its intention to continue the analysis in the coming five years.

6

97

4 52 3STEP

Source: jetBlue, “A Sustainability Accounting Standards Board (SASB) and Task Force on Climate-related Financial Disclosure (TCFD) Report”

jetBlue ”A Sustainability Accounting Standards Board (SASB) and

Task Force on Climate-related Financial Disclosure (TCFD) Report”

jetBlue ”A Sustainability Accounting Standards Board (SASB) and

Task Force on Climate-related Financial Disclosure (TCFD) Report”

[jetBlue (Transportation) (2/2)]

The Company presents potential financial risk impacts qualitatively,

and explains corporate strategy and mitigation measures.

Source: jetBlue, “A Sustainability Accounting Standards Board (SASB) and Task Force on Climate-related Financial Disclosure (TCFD) Report”

Transition Risk Physical Risk

6

98

4 52 3STEP

Climate-related RiskPotential Financial

Impact

Strategy and Mitigation

Measures

Policy & Legal

• Increased climate change

related regulation and

policies resulting in:

Higher fuel and/or

carbon prices

Additional emissions-

reporting obligations

Mandates on and

regulation of existing

products and services

• Higher compliance

and mitigation costs

Preparation for

Regulatory Change

• Implementation of monitoring,

data aggregation, and

calculations required by new

regulations before mandated

implementation

• Reporting in accordance with

SASB, TCFD, and other

reporting schemes

• Proactive emissions offsetting

to establish relationships and

processes

• Engagement with regulations

and industry organizations

• Cost reduction activities

Enhanced Data Analytics

• Monitor fuel consumption

and resulting carbon

emissions

• Model or forecast carbon-

related costs to determine

economic impact

Climate-related RiskPotential Financial

Impact

Strategy and

Mitigation Measures

Acute

• More frequent and

severe weather

events(e.g., hurricanes

and snow storms)

leading to business

interruption and damage

across operations and

supply chain (including

aircrafts and/or fuel

supply)

• Loss of revenues

• Increased costs in the

form of operational

strain, customer

compensation, and

crewmember overtime

pay

• Established operating

procedures that allow us

to cancel flights early if

we predict that extreme

weather will impact

safety, inconvenience

customers, or disrupt

crewmembers’ ability to

perform

• Coastal assessments

and management plans

[Aurizon (Transportation)]

The Company considers the implications of the three policy

scenarios of IEA, WEO, and ETP for the coal business

Scenario analysis in Sustainability Report

Source: Aurizon, “Sustainability Report 2017”

The scenario assumes no changes in

policies. Partly due to population growth, the

demand for fossil fuels will increase.

The scenario takes account of broad policy

commitments and plans announced by countries,

including national pledges to reduce GHG and plans to

phase out fossil-energy subsidies (NDC assumptions).

The scenario is consistent with the goal of limiting the

global increase in temperature to 2C. Countries will

adopt carbon tax and emissions trading, resulting in a

reduction in fossil fuel consumption.

70%

30%

Coal-related revenues(Below Rail)

Metallurgical coal Thermal coal

2025 20302015 2020

0

200

300

400

500

(million tonnes of coal equivalent)

(year)

+1.2%

+0.2%

-0.1%

-1.6%

CAGR

to 2030

CPS

NPS

2DS (adjusted market share)

2DS

Australia export volumes projected under IEA

scenarios (compared with 2014)

In the 2DS Scenario, the IEA projects global coal trade to

reduce by 31% (metallurgical coal by 9% and thermal coal

by 38%) by 2030 compared with 2014. The share of high

quality Australian coal is expected to increase by 10%.

52%

48%

Coal-related revenues(Above Rail)

Thermal coal accounts for some 50% of the

revenues of the transport business, but for a mere

30% of the revenues of the network business. The

Company considers that climate change impacts on

the entire business are limited.

1 2

7

99

4 52 3STEP

WEO-CPS(Current Policies Scenario)

WEO-NPS(New Policies Scenario)

ETP-2DS(2 Degree Scenario)

[Toyota Motor (Transportation)]

The Company performs scenario analysis with the ratio of electric vehicles and

carbon pricing as two variable parameters

Source: Toyota, “Sustainability Data Book 2018”, September 2018.

8

100

4 52 3STEP

TOYOTA MOTOR CORPORATION

“Sustainability Data Book 2018”(September, 2018)

Scenario analysis featured in the annual report

[Unilever (Consumer Staples) (1/4)]

The Company presents the findings of its scenario analysis in annual reports

The scenario analysis is included in the “Risks” section.

Source: Unilever, “Annual Report and Accounts 2017”

9

101

4 52 3STEP


The report presents assumptions made for the 2C and 4C scenarios


9

102

4 52 3STEP

Climate change has been identified as a principal risk to Unilever. To further understand the impact that climate

change could have on Unilever’s business we performed a high level assessment of the impact of 2C and 4C

global warming scenarios.

The 2C and 4C scenarios are constructed on the basis that average global temperatures will have increased by

2C and 4C in the year 2100. Between today and 2100 there will be gradual changes towards these endpoints,

and we have looked at the impact on our business in 2030 assuming we have the same business activities

as we do today. We also made the following simplified assumptions:

In the 2C scenario, we assumed that in the period to 2030 society acts rapidly to limit greenhouse gas

emissions and puts in place measures to restrain deforestation and discourage emissions (for example

implementing carbon pricing at $75-$100 per tonne, taken from the International Energy Agency’s 450

scenario). We have assumed that there will be no significant impact to our business from the physical

ramifications of climate change by 2030 – i.e. from greater scarcity of water or increased impact of severe

weather events. The scenario assesses the impact on our business from regulatory changes.

In the 4C scenario, we assumed climate policy is less ambitious and emissions remain high so the physical

manifestations of climate change are increasingly apparent by 2030. Given this we have not included

impacts from regulatory restrictions but focused on those resulting from physical impacts.

We identified the material impacts on Unilever’s business arising from each of these scenarios based on existing

internal and external data. The impacts were assessed without considering any actions that Unilever might

take to mitigate or adapt to the adverse impacts or introducing new products that might offer new

sources of revenue as consumers adjust to the new circumstances.


The report presents the findings of analysis under the 2C and 4C scenarios


9

103

4 52 3STEP

The main Impacts of the 2C scenario were as follows:

Carbon pricing is introduced in key countries and hence there are increases in both manufacturing costs and the costs

of raw materials such as dairy ingredients and the metals used in packaging

Zero net deforestation requirements are introduced and a shift to sustainable agriculture puts pressure on agricultural

production, raising the price of certain raw materials

The main impacts of the 4C scenario were as follows:

Chronic and acute water stress reduces agricultural productivity in some regions, raising prices of raw materials

Increased frequency of extreme weather (storms and floods) causes increased incidence of disruption to our

manufacturing and distribution networks

Temperature increase and extreme weather events reduce economic activity, GDP growth and hence sales levels fall

Our analysis shows that, without action, both scenarios present financial risks to Unilever by 2030, predominantly

due to increased costs. However, while there are financial risks that would need to be managed, we would not have to

materially change our business model. The most significant impacts of both scenarios are on our supply chain where

costs of raw materials and packaging rise due to carbon pricing and rapid shift to sustainable agriculture in a 2C

scenario and due to chronic water stress and extreme weather in a 4C scenario. The impacts on sales and our own

manufacturing operations are relatively small.

The results of this analysis confirm the importance of doing further work to ensure that we understand the critical

dependencies of climate change on our business and to ensure we have action plans in place to help mitigate these risks

and thus prepare the business for the future environment in which we will operate. We plan to conduct further analysis on

the impact of climate change on our agricultural supply chain and the impact of changing weather patterns (including both

persistent effects such as droughts and the temporary effects of storms) on critical markets and manufacturing.

Scenario analysis featured in the annual report


The Company uses scenario analysis to show their present efforts are appropriate

Assumptions of

analysis under

the 2C and 4C

scenarios

(as in the

previous slides)

Findings of

analysis under

the 2C and 4C

scenarios

(as in the

previous slides)

Introducing corporate

efforts against climate-

change impacts on

existing supply chains

References to pages

featuring corporate effort

for climate change and

water

Explaining why the TCFD

recommendations are

adopted, and presenting

corporate governance for

climate-change risks and

opportunities

Introducing corporate

efforts against climate-

change impacts on

existing supply chains

(continued)


9

104

4 52 3STEP

Chapter 4 References on Degree of

Risk Importance in Selected Sectors This chapter provides materials for scenario analysis, part of which were used for

assessment of the degree of risk importance under the Ministry’s support program.

105

4. References on Degree of Risk Importance in

Selected Sectors

i. Energy Sector

ii. Transportation Sector (Maritime

Transportation, Passenger Air Transportation,

Automobiles)

iii. Buildings/Forest Products Sector

[i. Energy Sector]

List of views by each research report on the importance of risks for the

energy sector

Major

Institutions, etc.Views

Sustainability

Accounting

Standards

Board (SASB)

GHG emissions and efficient energy use are

especially important as indicators of climate

change risk analysis.

2C Investing

Initiative (2ii)

Electric power consumption, alternative

energies, and technological innovations

among others are assumed to be important

transitional risks unique to the electric power

(generation) industry

Companies'

CDP

Disclosure

Transition risks from changes in emission/fuel

regulations and customer needs, physical

risks from variability in precipitation/weather

patterns and others are mostly recognized by

companies

European Bank

for

Reconstruction

and

Development

(EBRD)

The energy sector is susceptible to a wide

range of physical risks, including storms,

cyclones, extreme rainfall and flood, extreme

heat, variability in temperatures, sea-level rise

and melting of permafrost

Tra

nsitio

n R

isks

Ph

ys

ica

l Ris

ks

1

2

3

4

Other

InstitutionsViews

CDP Research

Report

Climate change risks of the electric power

generation business are evaluated from the

ratio of power generation by fossil fuels, CO2

emissions, carbon costs, and use of water

related to power generation equipment,

among others.

International

Investors

Group on

Climate

Change(IIGCC)

For the electric power generation business,

transition risks related to GHG emission

regulations, changes in demand for electric

power, technological innovations and

reputation are substantial, and physical risks

for long-term assets are substantial as well

Kepler

Cheuvreux

Transition

Research

Highly important physical risks in the electric

power generation business are water risk

(drought) and rise of external temperatures

EON UK

Report

The energy sector is susceptible to a wide

range of physical risks, including storms,

cyclones, extreme rainfall and flood, extreme

heat, variability in temperatures, sea-level rise

and melting of permafrost

Tra

nsitio

n R

isks

Ph

ys

ica

l Ris

ks

5

6

7

8

106

Source: SASB, Electric Utilities Sustainability Accounting Standard、Industry Brief

Climate-related Disclose Topics

Items and Accounting Indicators Required to be Disclosed for the Electric Power Utility Industry (Excerpt)

GHG Emissions & Energy Resource Planning

(1) Gross global Scope 1 emissions, (2) percentage covered under emissions limiting

regulations, and (3) percentage covered under emissions-reporting regulations

Air Quality Air emissions of the following pollutants: NOx (excluding N2O), SOx, particulate matter

(PM10), Pb, and Hg; percentage of each in or near areas of dense population

Community Impacts of Project Siting

Number of projects requiring environmental or social modification, percentage of

modifications resulting from formal public interventions or protests

Discussion of community engagement processes to identify and mitigate concerns regarding

project environmental and community impacts

End-Use Efficiency & Demand

Percentage of electric load served by smart grid technology

Customer electricity savings from efficiency measures by market

Grid Resiliency Number of incidents of non-compliance with North American Electric Reliability Corporation

(NERC) Critical Infrastructure Protection standards

(1) System Average Interruption Duration Index (SAIDI), (2) System Average Interruption

Frequency Index (SAIFI), and (3) Customer Average Interruption Duration Index (CAIDI),

inclusive of major event days

Management of the Legal & Regulatory Environment

Discussion of positions on the regulatory and political environment related to environmental

and social factors and description of efforts to manage risks and opportunities presented

(Reference) Standards by SASB for each industry in disclosing sustainability information for investors

Overview of the institution: SASB(Sustainability Accounting Standard Board)

A non-profit body to promote the disclosure of information on sustainability to meet the needs of investors

Summary of the report:

Formulated and disclosed sustainability accounting standards by industry type for the disclosure of

financial information

Regarding the sustainability disclosure items (environment, community impact, labor safety, end use

efficiency, crisis management, grid resilience, and statutory regulation-related), presented items unique

to the electric power utility industry, and prepared disclosure indicators as sustainability standards

As an important disclosure item for the electric power utility industry, establish indicators for “GHG and air pollution materials,

community impact, efficiency and grid” for the environmental aspect

GHG/air pollution material emissions, and grid

resilience/efficiency, to be subject to statutory regulations,

are important issues for the electric power utility industry

Statutory regulations have been strengthened for electric

power utilities which are major sources of emitting GHG

and air pollution materials

If emission regulations become stricter including GHG to

make businesses using certain power generation facilities

unprofitable, there will be stranded assets.

Since GHG emission reduction not only by power

generation but also by use are deemed important, initiatives

such as smart grid and demand response are also required.

In addition, climate change has also increased the risk of

physical damage to the power distribution networks.

[i. Energy Sector]

Sustainability disclosure standards required by SASB

1

107

GHG emissions and efficient use of energy are especially important as indicators for

climate change risk analysis

[i. Energy Sector]

Transition Risk Scenarios by 2ii

Trends Background

Consumption is

expected to

increase globally

Demand changes will respond mainly to efficiency measures, and

macroeconomic and demographic factors. These factors imply that

dynamics in developed and developing economies will be different, with the

demand in the latter increasing at a higher pace In some countries.

Fuel Switch The shift from fossil fuels to renewable energy-based power is going to be

driven by three main forces: The increase of thermal coal, gas and CO2

prices, the support from policymakers for the development of new low-

carbon technologies and the decreasing marginal costs of renewable power

production. Under both the LCT and the ACT scenarios, the total share of

fossil fuels will decrease. Under the ACT the share of renewables need to

surpass that of fossil fuels to achieve the 2C target.

Policy- and

market induced

technology

change

Incentives from policymakers will enable the transition from a fossil fuel-

based economy to a renewable based one. Policy instruments such as

subsidies, taxes and levies can be put in place to enable this transition.

Most of the countries under scope have already started to incentivize

renewables and/or disincentivize fossil fuels-based power generation as part

of their strategy to achieve their long-term renewables share targets. In

addition to policies, changes in the relative economics of renewable

technologies versus fossil fuels are similarly expected to drive fuel switching.

(Reference) Transition risk scenario by 2C investing initiative for companies responding to TCFD recommendations Overview of the institution: 2C investing initiative

A think tank developing climate change risk indicators and policy options in the financial markets Purpose of the report:

To present transition scenarios in line with TCFD recommendations, which companies can refer to when conducting financial risk analysis and scenario analysis (ACT (ambitious climate transition) assuming +2C world and LCT (limited climate transition) with +3-4C)

To establish important parameters for each of 8 sectors with large energy consumption, such as the electric power industry and automobile industry, and consider how parameters should be based on the existing scenarios such as IEA.

Deriving 5 risk analysis parameters based on the expected trend of the electric power (generation) industry toward low carbonization

Category Parameters

Production &

Technology#1 Electricity production (TWh)

#2 Electricity capacity (GW)

Market pricing

#3 Levelised costs of electricity

(EUR/Mwh)

Policy Mandates,

Incentives & Taxes #4 Subsidies (EUR/Mwh)

#5 Effective carbon rates (EUR/tCO2)

108

Electric power consumption, alternative fuels, and technological innovations among others are important transition risks unique to the electric power (generation) industry

2

Source: 2ii.& The CO-Firm. “The Transition Risk-O-Meter”. 2017.

[i. Energy Sector]

Companies' Replies to CDP

Risk ItemNo. of

RepliesInfluence Potential Impact Period

Direct-

nessFeasibility Comments (excerpt)

Uncertainty

about New

Regulations

5

• Low-

Med

• Med

• Med-

High

• Higher operational

cost

• Higher asset cost

• Lower demand

Short- to

long-

term

Direct

Likely-

Virtually

certain

If the Japanese government adds/strengthens

regulations to reduce CO2 emissions, the cost of power

generation will rise, which will raise the selling price of

electricity, possibly affecting demand and sales.

Fuel/Energy

Regulations3

• Low-

Med

• Med-

High


cost

• Lower production

Less

than 3

years

Direct/

Indirect

Unlikely-

Virtually

certain

Since a lot of energy is used in the process of

manufacturing oil products from crude oil, excessive

taxation on fuel and mandatory regulations will restrain

production activities. Restrained production activities will

lower the operating ratio of devices, making efficient

management difficult.

Product

Efficiency

Regulations

and Standards

3• Med

• Med-

High


cost


• Lower demand

3 years

or more

Direct/

IndirectLikely

Strengthened regulations on the efficient use of energy,

etc. could cause an unexpected decrease in demand for

energy. There are energy-saving related directives

issued in Europe, which may affect sales.

Carbon Tax 2• Med-

High

• High


cost

1-6

yearsDirect

Unlikely/

Likely

There are various risks, including uncertainty about

reduction of total emissions, possible changes in carbon

prices depending on political decisions, decrease in

demand and market share due to the increased cost of

using fossil fuels, and risk of inflexible carbon prices at

the time of recession.

Cap-and-Trade 2 • Med• Higher operational

cost


1-3

yearsDirect

Likely/

Very likely

Since we have not been given flow quotas under EU’s

ETS system since 2013, we are purchasing quotas for

almost all emissions. With the price of quotas as well as

energy prices changing, lack of liquidity makes risk

hedge difficult.

Recognition by Companies on Risks from Regulations (see Companies’ Replies to CDP)

Please answer

details of risks from

regulations among

the current or future

potential climate

change risks that

may affect your

company’s

business activities,

revenue and

expenditure.

CDP Question

109

Transition risk by emission/fuel regulations is recognized by the largest number

of companies (1/2)

3

Source: Companies'

Replies to CDP

[i. Energy Sector]


Risk ItemNo. of


Direct-


Environmental

regulations in

general (incl.

plans)

2• Med

• Med-

High


cost

• Social detriment

3-6

yearsDirect Likely

Various laws for pollution and environmental problems

are applied to the oil industry, which bears the cost of

complying with such regulations. If measures for

environmental problems are further strengthened, we will

be hard pressed financially by bearing the cost of

improving and updating equipment.

Obligation to

report

emissions1

• Med-

High• Lower stock price

(market value)

3-6

yearsDirect Very likely

If additional reporting obligations for emissions are

imposed, there will be a risk of not being able to meet the

reporting standards of EU’ ETS and regulatory

authorities for the gas and electric power markets.

Restriction on

air pollution1 • Med


cost

6 years

or moreDirect Likely

With stricter regulations on the restraint of air pollution

including an EU Directive to be implemented in 2020,

French regulations implemented in 2017 and an IED

Directive recently added, there may be issues for

technologies, competition, and updates of power

generation facilities owned.

International

agreement1 • High • Lower demand

1-3

yearsDirect

More likely

than not

International agreements pose substantial uncertainty.

Electric power companies in Europe may lose

competitiveness due to the commitment under the Paris

Agreement and emission trading in EU among others. It

could raise the selling price of electricity to reduce the

demand.

Renewable

energy1

• Low-

Med• Lower production

6 years

or moreDirect

More likely

than not

If there is a regulatory reform without sufficient

development in Germany causing an excessive rise of

the price in the fixed price purchase system, there may

be a risk of reducing energy production.

Moreover, if companies in real estate business, etc. are

allowed to enter into distributed energy production and

energy-saving services, there will be more competition in

the market.


Please answer

details of risks

from regulations

among the current

or future potential

climate change

risks that may

affect your

company’s

business

activities, revenue

and expenditure.

CDP Question

110

3

Transition risk by emission/fuel regulations is recognized by the largest number

of companies (2/2)

Source: Companies'

Replies to CDP

[i. Energy Sector]


Source: Companies'

Replies to CDP

Recognition by Companies on Physical Risks (see Companies’ Replies to CDP)CDP Question

Please answer

details of physical

risks among the

current or future

potential climate

change risks that

may affect your

company’s

business

activities,

revenue and

expenditure.

Risk ItemNo. of


Direct-


Variability in

precipitation4 • High



capacity

6 years

or moreDirect

More likely

than not/

Likely/

Very likely

Changes in precipitation patterns due to the amount of

precipitation and seasons increase/decrease the amount

of water in rivers. If the amount of precipitation decreases

causing water shortage, there will be a risk of a lower

operation rate of hydroelectric power stations.

Tropical

cyclone

(typhoon/

hurricane)

3

• Low-Med

• Med-

High


cost


capacity

Less

than 1

year/6

years or

more

DirectUnlikely/

Likely

If a large typhoon directly hits the Kanto region, there will

be a risk of power failure or unstable electric power supply

for a long period of time due to high tides and river floods

in addition to rainstorms. Moreover, it will incur costs for

restorations. With the influence of these, there is a risk for

business performance and finance.

Higher

average

temperature

2• Med-

High• Higher operational

cost

6 years

or moreDirect

More likely

than not/

Virtually

certain

With the rise in the average temperature, demand for

electricity will be less predictable especially due to the use

of air-conditioner in summer.

Snow

accumulation

and ice

2

• Med-

High

• High


cost


capacity

6 years

or moreDirect

More likely

than not/

Likely

Accumulated snow may affect the energy supply and

service provision. Since disruption of energy supply entails

huge costs, risks due to accumulated snow and ice should

be carefully considered.

Higher sea

levels2

• Low-Med

• Med-

High


cost

• Social detriment

6 years

or moreDirect

Very likely/

Virtually

certain

While not an immediate issue, power stations on the coast

may be affected by higher sea levels. If higher sea levels

increase water flowing into power stations, seaweed may

enter into stations. Moreover, damage by floods and the

like because of extraordinary weather affects equipment

as well.

Other climate

change-

related

physical risks

2

• Med-

High

• High


capacity


Less

than 1

year/6

years or

more

Direct/

Indirec

t

Likely

There are already influences of climate change, with a

rainstorm having suspended wind power generation. It

lowers electric power generation, with a risk of damaging

assets. Moreover, there is also a risk of damaging the

power grid with forests blown away by heavy snow,

hailstones, or rainstorms.111

3

Physical risks from variability in precipitation/weather patterns are recognized by

the largest number of companies (1/2)

[i. Energy Sector]



Please answer

details of physical

risks among the

current or future

potential climate

change risks that

may affect your

company’s

business

activities, revenue

and expenditure.

Risk ItemNo. of

RepliesInfluence

Potential

ImpactPeriod

Direct-


Average

temperature1 Unanswered

• Lower

production

capacity

Un-

answeredUn-

answered

Un-

answered

In France, a rise of temperature by 1C will decrease the

production capacity by 2,400MW. Moreover, a rise in

water temperature in the river during summer will affect

the cooling of fossil fuels and nuclear power generation.

As there is also regulation on waste water temperatures

after it’s used for cooling because there is a risk of losing

electric power due to higher water temperatures.

Impact on

natural

resources

1 • Med-High• Lower

production

capacity

6 years or

moreDirect Very likely

Availability of natural resources may change. For

example, hydraulic power generation, the cooling system

of thermal power generation, efficiency of thermal power

generation, and resilience of power grids will be affected.

Moreover, bio-diversity around power stations may also

be affected.

Uncertainty

about physical

risks

1 • Med-High• Lower

production

capacity

Unknown Direct Likely

For asset planning, long-term climate change should be

taken into account. Since new power stations will be

used for the coming several decades, they should be

verified as to whether resilient to changes going forward.

However, there are a lot of uncertainties about the long-

term influence of climate change and what influence will

be incurred for suppliers.

112

3

Physical risks from variability in precipitation/weather patterns are recognized by


Source: Companies'

Replies to CDP

[i. Energy Sector]


Recognition by Companies on Other Risks (see Companies’ Replies to CDP)CDP Question

Please answer

details of other

risks among the

current or future

potential climate

change risks that

may affect your

company’s

business

activities, revenue

and expenditure.

Risk ItemNo. of

Replies

Influenc

ePotential Impact Period

Direct-


Change in

customer

behaviors

4

• Med

• Med-

High• Lower demand

1 year

or moreDirect

Indirect

More likely

than not/

Very likely

We are mainly engaged in the “Oil

business,” ”Petrochemical business” and “Oil

development business” of which the oil business

accounted for more than 90% of net sales in FY2016. If

many consumers become to choose hybrid cars and

electric vehicles considering the environmental loading of

oil products, we will have no choice but to reduce

business activities.

Reputation 3

• Low-

Med

• Med

• Lower demand

• Lower estimated

brand value

1 year

or moreDirect

Unlikely/

Likely

Since the domestic electric power industry accounts for

30% of CO2 emissions, emission reduction goals cannot

be achieved without improving efficiency responding to

climate change, including highly efficient power

generation equipment and energy-saving. This has a

large impact on consumers; and failure to meet

consumer expectations will present a risk of lowering

enterprise value.

Uncertainty

about market

signs

2• Med-

High

• Lower demand


cost

1 year

or moreIndirect

More likely

than not/

Likely

Various changes will appear in the market due to climate

change, requiring responses to them, and demand for

products and services related to energy efficiency may

become higher while demand for energy supply may

become lower. Integration of electricity, mobility and

heating sectors may bring about fundamental change to

businesses going forward.

113

3

Change in customers’ needs is also recognized as a climate change risk by many

companies

Source: Companies'

Replies to CDP

[i. Energy Sector]

Physical Risks and Opportunities by EBRD

(Reference) Assessment Guidance for Physical Risks and Opportunities from TCFD Recommended Initiatives

Overview of the institution

• EBRD (European Bank for Reconstruction and Development): Established after the end of Cold War to develop market economies in

central and eastern European countries. It also advocates to promote the “environment-friendly sustainable development” and

aggressively makes investments related to climate change.

• GCECA (Global Centre of Excellence on Climate Adaptation):An organization established by the United Nations and governments of

countries including the Netherlands. Having partnerships with NGOs, financial institutions and others, it aims to promote adaptation to

climate through the sharing of knowledge and development of assessment methods, among others.


A guidance compiling points to note and indicators for reference when companies assess physical risks and opportunities, taking

into account TCFD recommendations. It was prepared after discussions in the working group combining financial institutions and

companies, among others.

It requires information disclosure and assessment of influence on assets based on analysis by value chain and geography.

In the electric power industry and public utility, storms, cyclones, extreme rainfall and flood, extreme heat, variability in temperatures,

sea-level rise and melting of permafrost are deemed to be highly influential physical risks

Source: “Advancing TCFD guidance on physical climate risks and opportunities”, Global research institute “Measuring physical climate risk in equity portfolios”

Risk Type Physical Risks

Influence

(electric

power)

Influence(public utility)

Acute Storms and cyclones High High

Acute Extreme rainfall and flood High High

Acute Extreme heat High High

Chronic Variability in precipitation Medium High

Chronic Variability in temperature High High

Chronic Water Stress Medium High

Chronic Sea-level rise High High

*Excerpt

ChronicAcute

114

4

The energy sector is subject to a wide-range of physical risks including storms, cyclones, heavy rains,

extreme flood and hot weather, temperature changes, higher sea levels, and melting of permafrost

[i. Energy Sector]

CDP Report “Charged or static”

(Reference) Summary results of the survey by CDP on measures for low carbonization by 14 major European electric

power companies

Overview of the institution: CDP

An international NGO tackling the environmental area, such as climate change. From the perspective of management

risk that climate change poses to companies, it does ratings by conducting surveys in a questionnaire format covering

major companies around the world.

Purpose of the report:

To update CDP’s League Table (rating table), publishing the analysis method and the result of surveying the measures

for low carbonization by 14 power generation companies in Europe

4 important assessment categories and items used for assessing the League Table

Source: “CDP - Charged or static”

Category Assessment Items and Methods

Transition risks CDP assesses companies’ current share of generation from fossil fuels, their emissions profiles and current

carbon costs under the EU ETS, and introduces a model to measure locked-in emissions between 2015-2050 from

current fossil fuel assets against companies’ implied carbon budgets to achieve a 2C transition

Physical risks CDP maps facility-specific water stress risks for today and for 2030 using WRI’s Aqueduct Water Risk Atlas and

compares this with companies’ water risk management measures

Transition

opportunities

CDP assesses companies’ progress and strategy in shifting towards renewable energy assets, as well as smart

energy solutions, and assess their CAPEX plans and capital flexibility

Climate governance

and strategy

CDP assesses emissions reduction targets, identifies alignment of governance and remuneration structures with low

carbon objectives, and actions taken in supporting or opposing policies to achieve a low carbon transition

115

5

Climate change risk in the power generation business is assessed by the ratio of power generation using

fossil fuels, CO2 emissions, carbon cost and water use related to power station equipment

[i. Energy Sector]

International Investors Group on Climate Change(IIGCC)

(Reference) Disclosure information items related to climate change in demand from investors, by IIGCC and others

About IIGCC (International Investors Group on Climate Change):

IIGCC is the leading group for collaboration among institutional investors in Europe focused on addressing investment risks and

opportunities presented by climate change


To formulate a reporting framework that meets investors’ demand for disclosure to power generation business, and

promote the disclosure of information that enables investors to recognize financial decisions due to climate change

To prepare a framework that takes into account the climate change issues most relevant to the power generation

business, in cooperation with Ceres (U.S.) representing an investors’ network for climate change risks and, IGC, an

investors’ group for climate change (Australia and New Zealand)

Source: “Global Climate Disclosure Framework For Electric Utilities”

Category Specific Examples of Risks and Opportunities Disclosed Contents

Risk

• Compliance costs as a result of regulatory constraints on greenhouse gas

emissions, in particular emissions of carbon dioxide

• Changing demand for energy/electricity. For example, energy and electricity

demand will be influenced in some markets by targets to improve energy

efficiency and increase renewable energy, as well as other associated

policies, and technology developments to address climate change, e.g. energy

storage and building standards

• Impacts on generating assets and hence on electricity generation due to

changing weather conditions

• Reputational risks

Climate change strategy:

• Companies are requested to provide a

brief overview of their climate change

strategy and their processes for

managing climate change risks and

opportunities

Quantitative data related to exposure to

climate change:

• Generation mix

• Electricity production

• Carbon dioxide (CO２) emissions

• Emissions allowances and other forms

of credits (e.g., EU-ETS)

Opportunity

• Reputational opportunities

• New business opportunities in areas such as emissions trading, energy

efficiency and renewable energy

116

6

For the electric power generation business, transition risks related to GHG emission regulations, changes in

demand for electric power, technological innovations and reputation are substantial, and physical risks for long-

term assets are substantial as well

[i. Energy Sector]

Kepler Cheuvreux Transition Research

(Reference)

Transition risk scenario analysis of electric power companies

conducted as part of the Energy Transition Project composed by

Kepler Cheuvreux Transition Research (Research group under an

independent financial service organization in Europe) and others

Summary of the project: Energy Transition Project (Kepler

Cheuvreux Transition Research, The CO-Firm, ClimateXcellence)

A project formed to encourage the energy sector to respond to

transition risks and opportunities of climate change


To analyze the financial impact of transition risks related to

climate change on power generation companies, analyzing 3

major electric power companies in Europe using 2 IEA

scenarios (RTS and 2DS) and publishing its methods and

results.

Measured items for the impact of transition risks related to climate change on

finance (right figure)

ACT (targeting 2C or less) and LCT (targeting 2.7C) are applied to measure using

the following 6 indicators related to regulations, technological innovations and

market changes:

• CO2 emissions (intensity/absolute)

• CO2 certificate prices

• Renewables share in electricity generation in 2050

• Average global temperature increase

• Electricity production

• Fossil fuels share (w/o CCS) in electricity generation in 2050

Source: “ET Risk consortium - Climate Scenario Compass”

117

7

Financial impact of transition risks for power generation business companies are measured by indicators

related to regulations on CO2 emissions, technological innovations such as renewable energies, and market

changes.

[i. Energy Sector]

Physical Risk Analysis by EON UK

(Reference) This report presents E.ON‟s assessment of

the impact of climate change on its UK Generation

business and its proposals for adaptation.

Overview of the company: E.ON UK

UK branch of E.ON, a major European energy company

headquartered in Germany supplying electricity and gas.


To assess the consequence of physical risks related to

climate change, analyze the importance of risks by 2

axes of “Likelihood” and “Consequence” and disclose

the result

Analyzing the importance of physical

risks from their likelihood and

consequence:

i. Table of consequence of physical risks

at the company level (current and future)

Larger the number of consequence,

the larger the consequence

ii. Matrix of importance

Matrix of importance analyzed by 2 axes

of likelihood and consequence

Most important physical risk

Water risk (drought) and

external temperature increase

Source: “E.ON UK - Climate Change Adaption”

Consequence

of hazard

Lik

elih

oo

d o

f h

aza

rd

Most important physical risks

with both high likelihood and

consequence

i. Table of consequence of physical risks at the

company level (current and future)

ii. E.ON CCA risk matrix

118

8

Highly important physical risks in the power generation business are water risk

(drought) and external temperature increase

Chapter 4 Reference on Degree of

Risk Importance in Selected SectorsThis chapter provides materials for scenario analysis, part of which were used for

assessment of the degree of risk importance under the Ministry’s support program

119


Selected Sectors

i. Energy Sector

ii. Transportation Sector (Maritime Transportation,

Passenger Air Transportation, Automobiles)


[ii. Transportation Sector (Maritime transportation)]

List of views by each research report on the importance of risks for the transportation sector

(maritime transportation)

Major Institution,

etc.View

Sustainability

Accounting

Standards

Board (SASB)

An indicator to measure the “Environmental

Footprint of Fuel Use” is useful as an important

accounting indicator for disclosure

2C Investing

Initiative (2ii)

We will add “Shipping Transport demand,” “Fuel

efficiency” and “Alternative fuel penetration (%)”

among others as indicators unique to the

maritime industry.

Companies’

CDP Disclosure

Three maritime companies recognize

international agreements, tropical cyclones and

North Sea route as risks/opportunities.

European Bank

for

Reconstruction

and

Development

(EBRD)

Transportation industry is likely to be affected

by the melting of permafrost

Tra

nsitio

n R

isks

Ph

ys

ica

l Ris

ks

1

2

3

4

Other Institution View

The

International

Council on

Clean

Transportation

(ICCT)

Possibility of introducing next generation

technologies, such as hydrogen and fuel cells,

in the maritime transportation industry

Tra

nsitio

n R

isks 5

120

(Reference) Standards by SASB for each industry concerning information disclosure to investors on

sustainability


SASB (Sustainability Accounting Standard Board)


Summary of the report

Formulating and publishing sustainability accounting standards of each industry for the disclosure of financial

information

For the two environmental disclosure items (Environment, Leadership and Governance), presenting items

unique to the maritime industry and preparing disclosure indicators as standards for sustainability

As important disclosure items for the maritime industry, 5 indicators were established for the “Environmental Footprint of Fuel Use”


SASB Information Disclosure Standards for Sustainability

Source: SASB. ”Marine Transportation Research Brief”, “Marine Transportation Sustainability Accounting Standard”. 2014.

Topic Accounting Metric

Environmental

Footprint of Fuel

Use

Gross global Scope 1 emissions

Description of strategy of plan to

manage emissions, emissions

reduction targets, and an

analysis of performance against

those targets

Total energy consumed,

percentage from heavy fuel oil,

percentage from renewables

Air emissions for the pollutants

Energy Efficiency Design

Index(EEDI)* for new ships

Disclosure Topics

Important Disclosure

Items for the Maritime

Industry

Environment Environmental Footprint

of Fuel Use

Ecological Impacts

Leadership and

GovernanceBusiness Ethics

Accidents & Safety

Management

Since the maritime

industry depends on

heavy oil, fuel cost

increase and GHG/air

pollution materials,

regulations are matters

of grave concern

Use of fuel-efficient

engines and fuel other

than heavy oil is

required.

*Indicators referred to in TCFD Guidance

An indicator to measure the “Environmental Footprint of Fuel Use” is useful as

an important accounting indicator for disclosure

1

121


2ii Views on the Importance of Risks (1/2)

(Reference) Transition risk scenario by 2C investing initiative /The CO-Firm for companies responding to TCFD recommendations


2C Investing initiative (2Cii): A think tank developing climate change risk indicators and policy options in the financial markets

The CO-Firm: A German boutique consultant limited company specializing in climate change and energy strategy

Purpose of the report

To present transition scenarios in line with TCFD recommendations, which companies can refer to when conducting financial risk

analysis and scenario analysis (ACT (ambitious climate transition) assuming +2C world and LCT (limited climate transition) with +3-

4C)

To establish important parameters for 8 sectors with large energy consumption, and consider how indicators should be based on the

existing scenarios such as the one by IEA

Five indicators are derived based on the trends in the maritime transportation industry towards low carbonization, in

addition to risk analysis indicators related to cross sectors


Trends Background

Demand

increase

The increasing relevance of global supply chains and the expansion

of trade routes will likely drive the increase of the sector’s demand.

Energy

efficiency

improvements

Efficiency improvements will come from the implementation of

technologies for fuel control, instrumentation and navigation, as well

as from operational changes. Efficiency measures will be pushed by

the industry itself and by market standards. Both have the potential

to reduce 40% of the sector’s emissions by 2040.

Increase in the

emissions

control areas

and gases in

scope

Currently areas with emission controls are set up in the North and

Baltic sea, U.S., Canada and some regions in China. The

International Maritime Organization (IMO) is not only looking towards

the increase of control areas and the maximum gas limits allowed

but as well as extending global requirements. Abiding by regulations

will thus require manufacturers to implement new reduced pollutant

technologies

Category Parameters

Production &

Technology

#1 Shipping Transport Demand(G tonne-km/year)

#2 Fuel Efficiency(kJ/tonne-km)

#3 Alternative Fuel Penetration (%)

Market pricing

Oil Price (USD/bbl) Coal Price (USD/ton)

Natural Gas

Price(USD/MBtu)

Electricity Charge

(2015 EUR/MWh)

#4 Marine Fuel prices(USD/GJ)

Policy

Mandates,

Incentives &

Taxes

Carbon Tax(2015 USD/T-Coeq)

#5 Efficiency Design Standards

We will add “Maritime demand,” “Energy efficiency” and “Alternative energy

usage ratio” among others as indicators unique to the maritime industry.

122

2

#1 Shipping Transport demand(G tonne-km/year)

“Under the ACT, demand for oil and coal transport is expected

to reach its peak in 2018 and decline to 2000 levels by 2050.

Demand for fossil liquid-bulk will decline by 28% through 2040

compare to 2015 levels. Likewise, bulk coal transport will

decline by 52% through 2040 from 2015.”

#2 Fuel efficiency(kJ/tonne-km)

“The ACT sees the maximum reduction in fuel consumption

for the dry-bulk segment with an average sector abatement of

52% by 2040 from 2010 levels.”

#3 Alternative fuel penetration (%)

“In the ACT scenario, technological advancements and bio-

availability allow the penetration of biofuels starting in 2020

and reaching a share of 20% by 2040. Hydrogen will be used

starting in 2030 occupying a share of 6% by 2040 in the

ACT.”

#4 Marine Fuel Prices(USD/GJ)

#5 Efficiency Standards

Demand for oil and coal will peak in 2018

and decrease to the level of 2000 in 2050

In 2040, fuel consumption for the dry-bulk

segment will decrease by 52% of that in

2010.

“HFO will remain as the lowest cost option, but from 2020, its

use alongside with emission abatement technologies will be

required to comply with emissions regulations.”

“EEDI compliance at current values is not sufficient to be

aligned in with the ACT or the LCT. Additional carbon intensity

reduction mechanisms are needed (i.e. technical measures,

alternative fuels, carbon offsets).”

The penetration of biofuels will start in

2020 to reach a 20% share by 2040, while

hydrogen will be used starting in 2030

occupying a 6% share by 2040

Although heavy oil will be cheap even in

2040, emission abatement technologies

will need to be introduced under

regulations from 2020.


2ii Views on the Importance of Risks (2/2)

Whereas EEDI will gradually impose

stricter reduction rates, additional

regulations and methods will be needed to

achieve emission reduction targets.

Indicators unique to the maritime transportation industry and future forecast

123

2


Category Risk Item Contents*Company

A

Company

B

Company

CInfluence Potential Impact Period

Direct-

ness

Likeli

-hoodComments (excerpt)

Tra

nsitio

n R

isks

/Opp

ort

un

itie

s

International

agreement

• EEDI

• SEEMP

• MBMs

High• Demand increase/

decrease3-6 years- Direct High

If IMO DCS (a system to collect and report

verified data such as fuel consumption) is

introduced, it will increase operational costs.

Product

Efficiency

Regulations

and

Standards

• Energy-

saving Law Med

• Operational cost

increase/ decrease1-3 years Direct Med Operational cost reduction due to energy-saving

Ph

ysic

al R

isks/O

pp

ort

un

itie

s

Tropical

Cyclones

• Route

change,

accidents

High• Operational/ capital

cost increase/

decrease

3-6 years Direct MedFuel costs will increase as transportation will be

delayed or routes will be changed to avoid cargo

damage and accidents

Changes in

Heavy Rains

and Drought

• Transaction

volume

decrease

Med• Demand increase/

decrease6 years -

Direct

IndirectLow

Risk of damaging cargo for dry-bulk business

Indirect impacts on clients

Higher sea

levels

• Terminal,

port facilities Low


increase/ decrease3-6 years Indirect Low

As there is a possibility of closing facilities, we

will consider alternative routes such as transition

to air transportation (indirect impact on supply

chain)

Precipitation

Changes• Delay Med

• Demand increase/

decrease6 years - Direct Med

By becoming able to respond to weather

changes, we can expect to obtain customers.

Snow and Ice• North Sea

Route High


increase/ decrease3-6 years- Direct Med

Melting of the North Sea ices will connect Europe

and the northern part of Asia, reducing fuel costs

and decreasing the risk of pirate attacks around

the Indian Ocean.

Oth

er

Ris

ks

/Op

po

rtu

nitie

s

Reputation• Investors

• Shippers Med

• Demand increase/

decrease1-3 years Direct Med

Getting excellent assessment from investors and

shippers, etc., by actively disclosing information

through CDP, etc., will increase transportation

business revenue.

Changes in

customer

behaviors

• Environment

-friendly

products

High• Demand increase/

decrease3-6 years Direct Med

With higher needs for environmental

conservation, we will need capital investment for

deploying energy-efficient ships.

Source: Companies' Replies to CDP *Additions. Other items are derived from the average of 3 companies.

Three maritime companies recognize international agreements, tropical cyclones

and North Sea route as risks/opportunities.


Study the Recognition of Transition/Physical Risks by Companies Based on Companies'

Replies to CDP

3

124

[ii. Transportation Sector (Maritime transportation) ]

Physical Risk Assessment on Each Industry by EBRD/GCECA

Transportation industry is affected by permafrost melt in addition to the common physical risks with other sectors

Source: EBRD. & GCECA. “Advancing TCFD Guidance on Physical Climate Risks and Opportunities”. 2018.

When assessing the influence of physical risks on

companies, influence and other risks are examined

depending on each business model, process and

location.

Specific influences given by physical risks

Examples:• Rise in energy cost and burden on workers due to

higher temperatures

• Water shortages and higher operational costs due to

water stress

• Asset damage and transfer costs due to cyclones and

others

• Route change due to permafrost melt

ChronicAcute

*Table is an excerpt from the report.

Permafrost

melt, ice

melt

4

Transportation industry is likely to be affected by the melting of permafrost

125

(Reference) Assessment Guidance for Physical Risks and Opportunities by Initiatives Receiving TCFD Recommendations


EBRD (European Bank for Reconstruction and Development): Established after the end of Cold War to develop market economies in

central and eastern European countries. It also advocates promotion of “environment-friendly sustainable development” and aggressively

makes investments related to climate change.

GCECA (Global Centre of Excellence on Climate Adaptation): An organization established by the United Nations and governments of




A guidance compiling points to note and indicators for reference when companies assess physical risks and opportunities, taking into

account TCFD recommendations. It was prepared after discussions in the working group combining financial institutions and companies,

among others.


(Reference) A report assessing next-generation technologies in land/maritime/air transportation from the perspective of climate

change


The International Council on Clean Transportation (ICCT): Established aiming to provide research/technologies/scientific analyses

on environmental issues from a neutral position. It aims to improve the environmental performance and energy efficiency of

land/maritime/air transportation to mitigate climate change.


Examining the possibility of zero emission technologies for each transportation industry such as air, maritime, off-road and railway,

assessing risks and opportunities of introducing technologies, and considering the significance of policies. The government requires

the industry to have improvement measures to mitigate climate change and improve air pollution, and recommends the promotion of

research and demonstrations of effective measures

While zero emission technologies are introduced in the transportation industries, the speed of penetration differs for each industry.

Maritime transportation industry is considering the introduction of next-generation technologies such as hydrogen and fuel cells.


Assessment of Next-Generation Technologies by ICCT

Source: ICCT. “Beyond Road Vehicles: Survey of Zero-emission Technology Options Across the Transport Sector”.2018.

In the maritime transportation industry, fuel cell ships are

already used for ferries and short-distance transportation,

use by large ships used for long distance is under

development.

Fuel cell ships are difficult to use for large ships despite their

effectiveness for reducing emissions, while hydrogen ships

need substantial fiscal support in the short and medium-tem.

*Top-left table is an excerpt from the report

Technical

assessment

High

Low

5

Possibility of introducing next generation technologies, such as hydrogen and

fuel cells, in the maritime transportation industry

126

[ii. Transportation Sector (Passenger Air Transportation)]


(passenger air transportation)

Major Institution,

etc.View

Sustainability

Accounting

Standards Board

(SASB)

Fuel use and GHG emissions are especially

important as indicators for climate change risk

analysis

2Investing

Initiative (2ii)

Fuel efficiency, alternative fuels, and fuel prices

among others are important transition risks

unique to the passenger air transportation

sector.

Companies' CDP

Disclosure

Transition risks from carbon emission/fuel

efficiency regulations, physical risks from

variability in precipitation/weather patterns, and

changes in customer needs, among others are

recognized by companies.

European Bank

for

Reconstruction

and

Development

(EBRD)

Physical risks deemed highly influential in the

transportation industry are four: Storms,

cyclones and heavy rains; extreme flood; sea-

level rise; and permafrost melt.

Tra

ns

ition

Ris

ks

Ph

ys

ica

l Ris

ks

1

2

3

4


International Air

Transport

Associations

(IATA)

For the passenger air transportation sector,

climate change-related risks with the highest

business impact and uncertainty include

alternative fuels, extraordinary weather,

international regulations on CO2 emissions, oil

prices, and environmentalist actions.

Marsh &

McLennan

Companies

(major US

insurance

company) report

As transition risk from GHG emission regulation

is high for the passenger air transportation

sector, it will be important to actively make early

investment in renewable energies and fuel

efficiency.

Tra

ns

ition

Ris

ks

5

127

6

Source: SASB, Airlines & Air Freight Logistics Sustainability Accounting Standard、Industry Brief

Disclosure Topic


Items in Air

Transportation Sector

Accounting Indicators

to be Disclosed

Environmental

Footprint of Fuel

Use

Greenhouse Gas Gross global Scope 1 emissions

Strategy or plan Description strategy or plan to manage

Scope 1 emissions, emissions reduction

targets, and an analysis of performance

against those targets

Fuel Use Total fuel consumed, percentage

renewable

Air pollution Air emissions for the following pollutants:

NOx, SOx, and particulate matter (PM)

Supply Chain

Management

Complete greenhouse gas

footprint across transport

modes

Metric tons CO2-e per ton-kilometer

(Reference) Standards by SASB for each industry concerning information disclosure to investors on sustainability

Overview of the institution: SASB (Sustainability Accounting Standard Board)




information

Regarding sustainability disclosure items (environment, labor-management relations, competition, safety, supply

chain), presenting items unique to the passenger air transportation sector and preparing disclosure indicators as

sustainability standards.

As an important disclosure item for the air transportation (passenger/cargo) industry, establish indicators for “emissions and

reduction plan for Scope 1, fuel consumption and the ratio of renewable energies, and emissions of air pollution materials” for the

environmental aspect

Fuel use and GHG emissions are important issues for the air

transportation sector

Reponses to sustainability issues including fuel efficiency

improvement for airframes and reduction of GHG and harmful

materials will improve the competitiveness of the air transportation

sector.

Since fuel is a major expenditure in the air transportation sector

(estimated by SASB at about 30% of operational costs), fuel

efficiency and use of alternative fuels will not only reduce costs but

also become counter-measures against rises in unstable fuel oil

prices.

Accounting for 13% of global GHG emissions, the air

transportation sector is especially susceptible to the strengthening

of regulations. In recent years, their impact has been expanding

with the increase in climate change-related regulations.


Sustainability Disclosure Standards Requested by SASB

Fuel use and GHG emissions are especially important as indicators for climate

change risk analysis

1

128

Trends Background

Changes in

volume

Demand for international flights is expected to grow on

average 4%-5% annually in the coming decades (ICAO

2016a). In contrast, a 2C transition would be associated

with a low-demand scenario for air travel as consumers

switch to rail, information technology, and local travel.

Scaling of

alternative

fuels

The scale up of alternative fuels will respond to evolving

market standards, development of country-specific policy

goals and further extension of international organizations

and coalition targets.

Efficiency

gains

Fuel efficiency gains will come from two main sources:

Technological improvements related to the airplane itself

and more sophisticated traffic management and

infrastructure use. The International Civil Aviation

Organization (ICAO) has set a medium-term goal to

improve fleet-fuel efficiency by 2% per year through 2020.

(Reference) Transition risk scenario by 2C investing initiative for companies responding to TCFD recommendations

Overview of the institution: 2C investing initiative

A think tank developing climate change risk indicators and policy options in the financial markets


To present transition scenarios in line with TCFD recommendations, which companies can refer to when

conducting financial risk analysis and scenario analysis (ACT (ambitious climate transition) assuming +2C world

and LCT (limited climate transition) with +3-4C)

To establish important parameters for each of 8 sectors with large energy consumption such as the passenger air

transportation sector and automobile industry, and consider how parameters should be based on the existing

scenarios such as IEA

Six risk analysis parameters are derived based on the trends in the passenger air transportation industry towards low carbonization

Category Parameters

Production &

Technology #1 Demand (passenger-kilometers)

#2 Fuel efficiency (g fuel/revenue passenger km)

#3 Biofuel Penetration (%)

Market pricing

#4 Jet fuel prices (USD / gallon)

Policy mandates,

Incentives & Taxes#5 Carbon credit mandates (# and Euro / tCO2)

#6 Fuel efficiency standards (kg/km)


2ii Views on the Importance of Risks

Fuel efficiency, alternative fuels, and fuel prices among others are important transition risks

unique to the passenger air transportation sector.

2

129 Source: 2°ii.& The CO-Firm. “The Transition Risk-O-Meter”. 2017.

Risk ItemNo. of


Direct-


Cap-and-Trade 5 Low-High• Higher

operational cost

• Lower liquidity

Less than 1

year or 3-6

years

Direct

Very likely-

Virtually

certain

There may be a negative impact on finances in relation to the

EU Emission Trading Scheme. Since emissions exceeding the

upper limit need to be offset, a negative impact on finance is

expected with the future rise in the carbon prices.

International

agreement4 Med-High

• Higher

operational costMedium- to

Long termDirect

Very likely-

Virtually

certain

With the establishment of CORSIA, there will be an upper limit

on CO2 emissions of international flights after 2021, and

emissions exceeding it will need to be offset. In addition, 2%

fuel efficiency improvement by 2050, introduction of carbon tax,

or the like, may affect operational costs.

Product

Efficiency

Regulations and

Standards

3

Un-

known/

Low-Med

• Higher

operational cost

Short- to

long-termDirect Likely

There will be costs to acquire airframes that are in compliance

with ICAO’s CO2 standards.

Carbon Tax 1 Med-High• Higher

operational cost3-6 years Direct Likely

By complying with different rules, there will be distortions in the

competitive environment and a risk of double taxation

(because carbon tax systems differ substantially between

reginal units and the EU zone, and they are not corresponding

to each other).

Fuel/Energy

Regulations1 Med-High • Lower demand

Less than 1

yearDirect

Virtually

certain

With the strengthening of fuel/energy regulations, operational

costs will increase. Moreover, such regulations are unique to

this country, which could make the competitive environment

less favorable to that of airline companies originating from

other countries.

Uncertainty

about New

Regulations

1Un-

known

• Higher

operational cost

6 years or

moreDirect Likely

There will be costs to make biofuels in compliance with

sustainability standards.

Lack of

regulations1

Un-

known• Lower demand

6 years or

moreIndirect

More likely

than not

There are differences in the use of bio-mass fuels by industry.

While bio-mass fuels are recommended in the road

transportation industry, regulations to ensure the use of bio-

mass are not currently developed in the air transportation

sector where alternative fuels cannot be used.

Source: Companies'

Replies to CDP


Please answer

details of risks

from regulations

among the current

or future potential

climate change

risks that may

affect your

company’s

business

activities, revenue

and expenditure.

CDP Question


Study the recognition of transition/physical risks by companies based on companies' replies

to CDP

3

Transition risks from carbon emissions/fuel efficiency regulations are recognized

by many companies.

130

Source: Companies'

Replies to CDP


Please answer

details of

physical risks

among the current

or future potential

climate change

risks that may

affect your

company’s

business

activities,

revenue and

expenditure.

Risk ItemNo. of


Direct-ness

Feasibility Comments (excerpt)

Extreme variability in temperature

4Low-Med

• Lower production capacity

• Higher operational cost

6 years or more

DirectIndirect

More likely than not-

Likely

Operational costs may rise because of the increase in the use of air-conditioners in airports and flights due to the extreme changes in temperatures. Moreover, even if temperatures become extremely low, similar events may occur, possibly decreasing sales.Due to the increase in extraordinary weather includinghurricanes, gusts, and heavy snow, there may be such consequences as cancellations/delays of flights, and serious damage to airport facilities. Moreover, we will need to invest in establishing reserve facilities in order to mitigate the effect of climate change in accordance with ICAO policies.

Other climate change-related physical risks

2Low-Med

• Higher operational cost

6 years or more

DirectAbout as

likely as not

Change in the direction jet streams pointed out by ICAO is a risk. This is because airplanes flying between continents will have to navigate in strong winds and therefore increase fuel consumption, possibly being forced to make unscheduled temporary landings to refuel.

Tropical cyclone (typhoon/ hurricane)

1Low-Med

• Unfulfilled business6 years or more

DirectVirtually certain

Flights may not be operated as scheduled due to direct hits by typhoons. In particular, it is difficult to forecast weather in Japan because of its geography, while there have been an increasing number of typhoons directly hitting it in the last ten years. This should be taken into account.



to CDP

Physical risk from variability in precipitation/weather patterns is recognized by


131

3

Source: Companies'

Replies to CDP


Please answer

details of physical

risks among the

current or future

potential climate

change risks that

may affect your

company’s

business

activities, revenue

and expenditure.

Risk ItemNo. of


Direct-


Snow and ice 1 Med• Lower production

capacity

Less

than 1

year

DirectAbout as

likely as not

Since there will be more delays and cancellations of

flights due to the increase in weather conditions where

snow and ice cannot be forecast, scheduled flights,

customer satisfaction, and subsequent flights will be

affected.

Higher sea

levels1 Low • Higher capital cost

6 years

or moreIndirect

More likely

than not

The sea-level rise may affect major markets for our

services such as coastal regions and islands. We may be

pressed to respond to changes in customers’ moving

patterns by securing the development of airports and

runaways that are not affected by sea-level rise.

Extreme

variability in

precipitation

1 Low• Lower production

capacity

Unknow

nIndirect

More likely

than not

If production and refining facilities are temporarily closed

due to extraordinary weather, fuel required for our

services may not be supplied.



to CDP

Physical risk from variability in precipitation/weather patterns is recognized by


132

3

Source: Companies'

Replies to CDP


Please answer

details of other

risks among the

current or future

potential climate

change risks that

may affect your

company’s

business

activities,

revenue and

expenditure.

Risk ItemNo. of


Direct-


Reputation 4Low-

Med• Lower demand

6

years

or

more

Direct

IndirectUnknown

If there are delays and cancellations of flights due to

climate change, customers’ trust in our company will

decline, possibly lowering the preference for air

transportation itself.

Unless we respond to environmental issues appropriately,

the reputation of our company, and ultimately the air

transportation sector as a whole, will deteriorate, possibly

decreasing demand from changes in customers’

behaviors.

Change in

customer

behaviors

2Med-


Medium-

to Long

term

Direct

Indirect

Likely or

Unknown

Led by corporate clients, customers’ behaviors are

changing to consider CO2 emissions. Since Japan is not

an advanced country in terms of biofuel development

with the air transportation sector being an industry with

substantial CO2 emissions, change to consumer

behaviors more considerate about CO2 emissions may

lead to the reconsideration of the use of air transportation.

Cargo transportation may also be changed to

transportation methods with less CO2 emissions than air

transportation .

Induction of

changes in

social

environment

1Un-

known• Lower demand

Un-

knownIndirect Unknown

Due to climate change, population may decrease in

coastal areas where our markets exist, or economic

situations may change in regions, countries and the

world. As a result, there may be uncertain impacts on

customers’ moving patterns.



to CDP

Change in customer needs are also recognized as a climate change risk by many

companies

133

3

In the transportation industry, storms, cyclones, heavy rains, extreme flood, sea-level rise, and permafrost melt are deemed highly

influential physical risks.

Source: "Advancing TCFD guidance on physical climate risks and opportunities”, Global research institute “Measuring physical climate risk in equity portfolios”

Type Physical Risks Influence

Acute Storms and cyclones High

AcuteExtreme rainfall and

floodHigh

Acute Extreme heat Medium

ChronicVariability in

precipitationLow

ChronicVariability in

temperatureLow

Chronic Water Stress Low

Chronic Sea-level rise High

Influences given by physical risks

differ depending on business

characteristics such as water and

energy consumption

Examples of specific influences

given by physical risks:

• Rise in energy cost and burden

on workers due to higher

temperatures

• Water shortages and higher

operational costs due to water

stress

• Asset damage and transfer

costs due to cyclones and

others*Excerpt

ChronicAcute


Physical Risk Assessment on Each Industry by EBRD and Others

Physical risks deemed highly influential in the transportation industry are four: Storms,

cyclones and heavy rains; extreme flood; sea-level rise; and permafrost melt.

4

134

(Reference) Assessment Guidance for Physical Risks and Opportunities from TCFD Recommendations


• EBRD (European Bank for Reconstruction and Development): Established after the end of Cold War to develop market economies in

central and eastern European countries. It also advocates to promote the “environment-friendly sustainable development” and aggressively

makes investments related to climate change.

• GCECA (Global Centre of Excellence on Climate Adaptation): An organization established by the United Nations and governments of





account TCFD recommendations. It was prepared after discussions in the working group combining financial institutions and

companies, among others.


(Reference) Future of the Airline Industry 2035 by IATA (International Air Transport Associations)

Overview of the institution: IATA

The International Air Transport Association (IATA) is the trade association for the world’s airlines, representing some 265

airlines or 83% of total air traffic. IATA supports many areas of aviation activity and help formulate industry policy on

critical aviation issues.


To forecast opportunities and challenges the industry may face and take measures that can be done from now.

To engage in the same discussion at individual airlines and their partners

To develop partnerships with governments to lay foundations for promoting sustainable horizontal links in the air

transportation sector. It will be ideal if a national strategy for air transportation is formulated.

Analyzing changing factors to have substantial impact on the air transportation sector in 2035

Source: IATA “Future of the airline industry 2035”

Among 13 changing factors identified by IATA, the following are deemed to be risks of climate change:

Environmental activism

Environmental activism may come from many

directions, the public, the workforce, or even

shareholders and governments. Generational and

societal shifts may lead to new tools while technology

and cyber activism provide new opportunities and

threats

Extreme weather events

Extreme weather events are expected to increase in

both frequency and severity, driven by climate change

Infectious disease and pandemics

In the 1960s many infectious diseases were

thought to be under control, but the emergence

of new threats such as HIV, SARS, Zika virus

as well as animal diseases such as BSE have

reacquainted the world with the risks

International regulation of emissions and

noise pollution

The airline industry contribution to overall CO2

emissions is relatively low compared to other

transport sectors, although forecasts to 2050

vary in optimism

Formulating the materiality matrix from changing

factors with the criteria of influence and uncertainty

to prepare four scenarios with the two axes of

“geopolitics ” and “data.”

→Predict futures with eleven themes along with

each scenario

Price of oil

After remaining unusually stable in the three

years prior, crude oil prices fell precipitously in

2014 and the future outlook is uncertain

Alternative fuels and energy sources

Alternative fuels and energy sources have the

potential to disrupt the geopolitical balance of power,

as well as to affect how businesses and the public

consume energy.

New Frontiers Sustainable Future

Resource Wars Platforms


Future Forecast for Air Transportation Sector in 2035 by IATAFor the passenger air transportation sector, climate change-related risks with the highest business impact and uncertainty

include alternative fuels, extraordinary weather, international regulations on CO2 emissions, oil prices, and environmental

activism.

5

135

(Reference) Climate change resilience handbook by a major U.S. insurance company Marsh & McLennan

Overview of the company:Marsh & McLennan

A major insurance group company headquartered in New York, U.S., providing advisory and solutions in the

areas of risk, strategy and human capital.


It states measures, with case studies, for business strategy, financial strategy, and risk management

to increase resilience to climate change risks

It states strategic issues for climate change risks in each industry of retail supermarkets, electric

power, airlines and energy industries.

Explaining risks and opportunities of emission regulations for the air transportation sector

Source: “Climate Resilience 2018 Handbook ”

Opportunities: With the promotion of expanded use of renewable

jet fuels by regulations, early strategic actions will create

opportunities.

Measures to implement opportunities (examples)

• Gradually expand the use of bio-refinery renewable jet fuels to

reduce fuel cost and increase their availability.

• Collaborate with airports and airframe manufacturers to develop

airframes and structures capable of efficient fuel transportation,

while meeting manufacturing requirements of engines.

• Use government funds to allocate resources actively to R&D in

sustainable renewable fuels

Risks: GHG emissions are expected to increase in proportion to

demand for airlines, which will be about double the current level by

2035. As emission regulations are planned to be in place within several

years, it is required to further move to renewable energies. In addition,

emission cost to be offset by CORSIA scheme* is expected to be lower

than variable cost of energy.

*Carbon Offsetting and Reduction Scheme for International Aviation:


Measures by US Insurance Company to Increase Resilience to Climate Change

As transition risk from GHG emission regulation is high for the passenger air transportation sector, it will

be important to actively make early investment in renewable energies and fuel efficiency.

6

136

[ii. Transportation Sector (Automobiles)]


(automobiles)

Major Institution,

etc.View

Sustainability

Accounting

Standards

Board(SASB)

Power train ratio and fuel efficiency/emissions

are especially important as indicators of climate

change risk analysis

2C Investing

Initiative(2ii)

As risk analysis parameters of the automobile

industry, sale, carbon fibers, battery price, fuel

efficiency standard and CO2 ratio are

established for each power train

Companies'

CDP DisclosureTransition risk from fuel efficiency regulation is

recognized by the largest number of companies.

European Bank

for

Reconstruction

and

Development

(EBRD)

Almost all physical risks are assumed to

substantially affect the automobile industry

Tra

ns

ition

Ris

ks

Ph

ys

ica

l Ris

ks

1

2

3

4


Kepler

Cheuvreux

Transition

Research

As items related to the trends, demand by

region, global total number of vehicles,

ownership ratio of automobiles, power train ratio,

emission intensity by power train, WTWCO2

emission ratio, and policy developments are

assumed.

International

Investors Group

on Climate

Change(IIGCC)

CO2 emissions and sales numbers are basic

disclosure data related to climate change.

Tra

ns

ition

Ris

ks

5

137

6



Source: SASB, ”Automobiles Sustainability Accounting Standard”、Industry Brief(2014)

TopicsAccounting Indicators

Required to be Disclosed

Fuel

Economy &

Use-phase

Emissions

Sales-weighted average

passenger fleet fuel

economy, consumption, or

emissions, by region

Number of (1) zero

emission vehicles (ZEV)

sold, (2) hybrid vehicles

sold, and (3) plug-in hybrid

vehicles sold

Disclosure Topics


Items for Automobile

Industry

Environment Materials Efficiency &

Recycling

Social Capital Product Safety

Human Capital Labor Relations

Business Model &

Innovation

Fuel Economy & Use-

phase Emissions

Leadership and

Governance

Materials Sourcing

(Reference) Standards by SASB for each industry concerning information disclosure to investors on sustainability

Overview of the institution: SASB (Sustainability Accounting Standard Board)




information

Regarding five environmental disclosure items (environment, social impacts, human resources, business models

and innovations, leadership and governance), presenting items unique to the automobile industry and preparing

disclosure indicators as sustainability standards.

Regarding GHG emissions as an important disclosure item for the automobile industry, two indicators related to “fuel efficiency and

emissions” are established

For other environment-related items, “Material efficiency and recycle” arising from the scarcity of resources are established as disclosure items.

Disclosure items for parts and the rental sector are also published, in addition to the automobile sector. For both, disclosure is required for items

related to material efficiency and recycle, and fuel efficiency.Response to GHG emissions is an important

issue for the automobile industry

Accumulation of GHG emitted by automobiles

will have a substantial effect on climate

change on a global scale

To reduce the risk of decreasing

competitiveness and demand, it is necessary

to meet fuel and emission standards required

by the society.

In fact, regulations on emissions and fuel

efficiency for vehicles are increasingly

becoming stricter globally.

Power train ratio and fuel efficiency/emissions are especially important as

indicators of climate change risk analysis

1

138


Transition Risk Scenario by 2C investing initiative for Companies Responding to TCFD

recommendations

Trends Background

The switch to zero-carbon

powertrains

There are differences in the penetration of various types of

vehicles under IEA 2C and 4C scenarios. (The IEA estimates

that Internal Combustion Engine (ICE) powered cars (e.g. petrol,

diesel) will only account for around 10% of total car sales in 2050

under the 2C scenario, with a rise in electric and fuel cell

alternatives. Zero-carbon powertrains are similarly set to grow

under a 4C transition, albeit at a less rapid pace.)

Changing economics around

car production

Manufacturing chains may benefit or be damaged due to the

influence of developments of other actors such as battery

manufacturing.

Increasing fuel efficiency

standards

In relation to oil prices, many customers have become to pay

more attention to fuel efficiency at the time of purchase.

A broader context of changing

consumption patterns and

technology changes

Beyond the perspective of low carbonization, there have been

structural changes in the usage of vehicles such as sharing.

(Reference) Transition risk scenario by 2C investing initiative for companies responding to TCFD recommendations

Overview of the institution:2C investing initiative

A think tank developing climate change risk indicators and policy options in the financial markets


To present transition scenarios in line with TCFD recommendations, which companies can refer to when

conducting financial risk analysis and scenario analysis (ACT (ambitious climate transition) assuming +2C world

and LCT (limited climate transition) with +3-4C)

To establish important parameters for 8 sectors with large energy consumption, such as the automobile industry,

and consider how parameters should be based on the existing scenarios such as the one by IEA

Five risk analysis parameters are derived based on the trend of automobile industry towards low carbonization

As risk analysis parameters of the automobile industry, sales, carbon fibers, battery prices,

fuel efficiency standards and CO2 ratios are established for each power train

2

139 Source: 2ii.& The CO-Firm. “The Transition Risk-O-Meter”. 2017.

Transition risk from fuel efficiency regulation is recognized by the largest number of

companies.

[ii. Transportation Sector (Automobiles)]Study the recognition of transition/physical risks by companies based on companies' replies to CDP

Risk ItemNo. of


Direct-

nessFeasibility Impact on VC Comments (excerpt)

Product

Efficiency

Regulations and

Standards

11 Med-High

• Higher capital cost

• Higher R&D cost


capacity


cost

• Lower demand

• Financial penalties

Short- to

long-

term

Direct

Unlikely-

Virtually

certain

• R&D

• Production

• Sale

As initiatives for climate change, strengthening of

CO2 emission regulations on vehicles are

accelerating globally. Countries have regulations

on their own. They not only have financial impacts

but also affect reputation of companies on the

environment.

Restriction on

Air Pollution3

Med-

Somewhat


1-6

yearsDirect

Unlikely

-Likely

• R&D

• Sale

If automobiles do not meet the level, there will be a

risk of decreasing demand and lowering sales. It is

important to respond to regulations and customer

demand.

Environmental

Regulations2

Somewhat

High


capacity

• Lower demand

3 years

or lessDirect

Very likely

-Virtually

certain

• Sale

We are required to submit a medium to long term

plan and a report on periodic energy consumption

to authorities: Insufficient improvements will lead to

a reputation risk.

Product

Labelling

Regulations and

Standards

2Somewhat

Low-High• Lower demand

1-6

yearsDirect

Indirect

Unlikely-

More likely

than not

• SaleDifferences in labeling regulations for products in

countries will encourage the improvement in

standard performance.

Cap-and-Trade 1Somewhat

Low• Higher operational

cost

3-6

yearsDirect

Virtually

certain• Production

Since 2013, new Directives for ETS have further

increased their impact on plants in Europe.

Carbon Tax 1Somewhat

High• Higher operational

cost

3-6

yearsIndirect

More likely

than not

• Procurement

• Production

Carbon tax may add huge costs to our business by

directly taxing the Company or through the taxation

on our suppliers.

Fuel/Energy

Regulations1

Somewhat

High• Higher capital cost

1-3

yearsDirect

Virtually

certain

• R&D

• Sale

Since the commercial market will change from

diesel cars to gasoline cars due to fuel regulations,

automobile manufacturers will need to change their

industry structure. Substantial capital investment

will be required for the rethinking and adaptation of

industrial processes.

International

Agreement1 High • Other

3-6

yearsDirect Very likely • Overall

The Paris Agreement has turned out to require

costly changes to long-term technological

strategies.

Source: Companies'

Replies to CDP


Please answer

details of risks

from regulations

among the current

or future potential

climate change

risks that may

affect your

company’s

business

activities, revenue

and expenditure.

CDP Question

3

140

Source: Companies'

Replies to CDP

Please answer

details of risk

from regulations

among the current

or future potential

climate change

risks that may

affect your

company’s

business

activities,

revenue and

expenditure

Risk ItemNo. of


Direct-


Changes in

Heavy Rains

and Drought

9 Low-High

• Lower

production

capacity

Short-

to long-

term

Direct

Indirect

Unlikely-

Very likely

•Procurement

• Production

• Sale

Typhoons, floods and droughts among

others cause substantial damage to

operations. We are currently operating in

regions with extreme climate risks including

India and Thailand, while having suffered a

considerable loss due to a cyclone in the

past.

Changes in

Natural

Resources

3 Low-Med• Higher

operational cost

1-3

yearsDirect

Indirect

About as

likely as not-

More likely

than not

• Procurement

• Production

We may see the shortage of water, metal

resources and the like, possibly leading to

unstable supply. Due to the spread of supply

chains all over the world, there will be a still

higher risk of natural resources shortage.

Extreme

variability in

temperature

3 Low-Med

• Lower

production

capacity

• Lower demand

Short-

to long-

term

Direct

Indirect

Likely

-More likely

than not

• Procurement

• Production

• Sale

Extreme temperatures and weather

phenomena will occur due to climate change.

Such extreme changes could incur damage

to production sites and transportation

infrastructure among others.

Changes in

Precipitation

Patterns

2

Somewhat

Low-

Somewhat

High

• Lower

production

capacity

Short-

to long-

term

Direct

IndirectLikely

•Procurement

•Production

There are extraordinary weather conditions

all over the world that seem to have been

caused by climate change. In particular, if

facilities of main suppliers are affected by

typhoons and floods with the effect of heavy

rains, delivery may be delayed and

operating ratio may be decreased and

possibly making it impossible to maintain

stable operations.

Tropical

cyclone

(typhoon/

hurricane)

1 High• Lower

production

capacity

1 year

or lessIndirect Likely

• Procurement

• Production

As climate change continues to raise the sea

surface temperatures, strong tropical storms

will increase in the Asian region, leading to

floods of rivers, possibly putting our

operations and supply chains in danger.


companies.


Recognition by Companies on Risks from Regulations (see Companies’ Replies to CDP)CDP Question

141

3

Source: Companies' Replies to CDP

Please answer

details of risk from

regulations

among the current

or future potential

climate change

risks that may

affect your

company’s

business

activities,

revenue and

expenditure.

Risk ItemNo. of

RepliesInfluence

Potential

ImpactPeriod

Direct-

nessFeasibility

Impact on

VCComments (excerpt)

Change in

customer

behaviors

7

Med-

Somewhat

High

• Lower

demand

Short- to

long-

term

Direct

Indirect

About as

likely as

not-

Very likely

• R&D

• Sale

Changes in consumer behaviors will decrease the

share in the market and profit. For example, fuel

prices and tax incentives are thought to affect

customer behaviors.

Reputation 3Somewhat

High• Lower

demand

1-6

years

Direct

Indirect

Likely-

Very likely• Sale

Consumers are concerned about climate change,

and companies unable to respond to it will invite the

decline of their trust and brand, possibly decreasing

the number of cars sold and damaging company

capital.

Changes in

Socio-

economic

Conditions

1 Med• Lower

demand

3-6

yearsDirect Likely • Sale

Due to the decrease in purchasing power,

consumers tend to hesitate to buy new cars, and

rather seek new mobility services to optimize the

use of individual cars.

Uncertainty of

Market

Signals

1Somewhat

High

• Response to

regulations

1 year or

lessDirect Likely • Sale

When gasoline prices are high, consumers may

choose trains and other transportation means rather

than automobiles.


companies.


Recognition by Companies on Risks from Regulations (see Companies’ Replies to CDP)CDP Question

142

3

The number of items of physical risks that have substantial effects on the automobile industry is next to those of the material industry, the public

infrastructure industry, and the food production industry.


EBRD Assessment Guidance on Physical Risks and Opportunities

Source: EBRE, ”Advancing TCFD guidance on physical climate risks and opportunities”(2018), Global research institute “Measuring physical climate risk in equity portfolios”(2017)

Influences from physical risks differ depending on

business characteristics such as water and energy

consumption

Examples of specific influences given by physical

risks:

• Rise in energy cost and burden on workers

due to higher temperatures

• Water shortage and higher operational cost

due to water stress

• Asset damage and transfer costs due to

cyclones and others

*Table on the left is an excerpt.

ChronicAcute

4

Almost all physical risks are assumed to substantially affect the automobile industry

143

(Reference) Assessment Guidance for Physical Risks and Opportunities by Initiatives Receiving TCFD recommendations

Overview of the institution:

• EBRD (European Bank for Reconstruction and Development): Established after the end of Cold War to develop market economies in central and

eastern European countries. It also advocates promotion of the “environment-friendly sustainable development” and aggressively makes

investments related to climate change.

• GCECA (Global Centre of Excellence on Climate Adaptation): An organization established by the United Nations and governments of countries

including the Netherlands. Having partnerships with NGOs, financial institutions and others, it aims to promote adaptation to climate through the

sharing of knowledge and development of assessment methods, among others.


A guidance compiling points to note and indicators for reference when companies assess physical risks and opportunities, taking into account

TCFD recommendations. It was prepared after discussions in the working group combining financial institutions and companies, among others.


(Reference) Analysis of financial effects that transition risks have on European OEM, by a financial research company

Overview of the institution: Kepler Cheurveux

A European financial service company providing intermediation and advice to the investment industry. It also conducts survey

research on the environment and governance by its ESG team.

Purpose of the report: As part of the ET project, Kepler Cheuvreux independently analyzed financial effects brought up by transition risks for BMW, Daimler

and VW. As analysis scenarios, transition risk scenarios prepared by 2C investing initiative (above) were used.

What is ET Risk Project (Energy Transition Risk Project)?:

A project aiming to provide assessment tools for financial risks and opportunities due to the transaction to a low carbon society

under the collaboration of institutions and research institutes, etc., including 2C investing initiative and Carbon Tracker.

Major trends in the transition to a low carbon society, which have an especially large

financial impact, are assumed.


Financial Impact Assessment of Transition Risks in European OEM

Source: Kepler Chervreux, “Transition risks in the automotive sector”(2018)

The following events are assumed as

examples of trends:

• Demand for products will increase

under both scenarios due to the

development of emerging markets

• The global total number of vehicles

will be more under LCT.

• Car ownership ratio will decrease more

under ACT than under LCT due to the

changes in transportation means such

as the development of compact cities.

• The market share of EV is larger under

ACT than under LCT.

• Automobile tax and abolition of fossil

fuel subsidies will help the

achievement of targets for climate

change

EBITDA analysis was conducted with the main

drivers of technological developments and

development by region

Trend-related Items

Demand by region

Global total number of vehicles

Car ownership ratio

Power train ratio

Emission intensity by power

train

WTWCO2 emission

increase/decrease ratio (from

the present)

Policy developments (fossil fuel

subsidies, automobile tax)

As items related to trends, demand by region, global total number of vehicles, ownership ratio of

automobiles, power train ratio, emission intensity by power train, WTWCO2 emission ratio, and policy

developments are assumed.

5

144

(Reference) Formulation by IIGCC and others of climate change-related disclosure information required by investors

Overview of the institution: IIGCC (International Investors Group on Climate Change)

IIGCC is the leading group for collaboration among institutional investors in Europe focused on addressing investment risks

and opportunities presented by climate change


To formulate a reporting framework in accordance with investors’ demand for disclosure to the automobile industry,

and thereby promote the disclosure of information, which enables investors to recognize financial decisions due to

climate change.

To prepare a framework taking into account the most relevant climate change matters for the automobile industry with

Ceres (US) representing the investor network for climate change risks and IGC (Australia and New Zealand) an

investor group for climate change.

Such framework has been integrated in CDP questionnaires since 2009.

To formulate the disclosure information required to assess climate change-related risks and opportunities automobile

companies face


Formulation by IIGCC of Climate Change-related Disclosure Information Required by

Investors

Source: “Global Climate Disclosure Framework For Automotive Companies ”

Disclosure Data Data Granularity

Sales volumes • Should provide an overview of sales volumes by fuel type / engine

technology and, if possible, by region/segment

CO2 emissions of vehicles sold • Should provide sales volumes by fuel type / engine technology

Clean technologies

(Ratio and number of new technology installed

cars )

• Should provide the details about sales of different types of clean

technologies

Request quantitative data on the number of cars sold, emissions, and clean technologies as the disclosure data to appropriately assess climate

change risks and opportunities each company is facing individually

Data on clean technologies is added for the purpose of overcoming the situation in 2009 where the business strategy and prospects of

technological development for each company’s emission reduction were not clear to investors.

6

CO2 emissions and sales numbers are basic disclosure data related to climate

change.

145

Chapter 4 References on Degree of

Risk Importance in Selected SectorsThis chapter provides materials for scenario analysis, part of which were used for

assessment of the degree of risk importance under the Ministry’s support program

146


Selected Sectors

i. Energy Sector

ii. Transportation Sector (Maritime

Transportation, Passenger Air Transportation,

Automobiles)


[iii. Buildings/ Forest Products Sector]

List of views by each research report on the importance of risks for the buildings/forest

products sector

Major Institution, etc.

View

Sustainability

Accounting

Standards

Board(SASB)

Indicators to measure “Sustainable

services“ are useful as important disclosure

accounting

2°Investing

Initiative(2ii)(No report on the sector)

Companies'

CDP Disclosure

Many companies recognize regulations of

product efficiency, etc., heavy rains and

droughts, and reputation among others as risks

and opportunities.

European Bank

for

Reconstruction

and

Development

(EBRD)

In the real estate industry, storms, floods, and

sea-level rise are expected to be significant

risks

Tra

nsitio

n R

isks

Ph

ys

ica

l Ris

ks

1

2

3

4


Risk analysis

report on the real

estate industry by

IIGCC

Buildings with low energy efficiency will face

transition risks including higher costs and lower

asset value, while the real estate industry will

have various physical risks with higher costs

and lower asset value.

Research report

by ACCLIMATISE

Climate change risks will bring about lower

asset values, higher costs and lower demand.

Tra

nsitio

n R

isks 5

147

6

Ph

ys

ica

l Ris

ks

(Reference) Standards by SASB for each industry concerning information disclosure to investors on

sustainability

Overview of the institution: SASB(Sustainability Accounting Standard Board)




information

Regarding two environmental disclosure items (business models and innovations, and leadership and

governance), presenting items unique to the construction material industry and preparing disclosure indicators

as sustainability standards.

As an important disclosure item in the construction material industry,

establishing two indicators for “Product innovations.”

Source: SASB, ”Automobiles Sustainability Accounting Standard”

TopicsAccounting Indicators

Required to be Disclosed

Product

Innovation

Percentage of products that

can be used for credits in

sustainable building design

and construction certifications

Total addressable market and

share of market for products

that reduce energy, water,

and/or material impacts during

usage and/or production

Disclosure

Topics

Important Disclosure Item

in the Construction

Material Industry

Business

Model &

Innovation

Sustainability Services

Leadership and

Governance

Transparent Information &

Management of Conflict of

Interest

Consumer and regulatory trends

are largely driving adoption of

sustainable building materials and

processes that are more resource

efficient and lower health impacts

of buildings throughout their

lifecycle.

Sustainable construction materials,

therefore, are likely to drive a

company’s long-term growth and

competitiveness

[iii. Buildings/Forest Products Sector ]


Indicators to measure “Sustainable services“ are useful as important disclosure accounting

1

148



to CDP

Risk ItemNo. of


Direct-

nessFeasibility

Impact on


Product

Efficiency

Regulations

and

Standards

16 Low-High

• Higher capital

cost

• Lower stock

prices

• Higher

operational cost

• Lower demand

Short-

to long-

term

Direct

Indirect

Likely

-Virtually

certain

• Planning

• Sale/

lease

• Mainte-

nance

EU government has introduced various energy

efficiency requirements, which are strict toward

various sectors including the real estate sector. If the

latest requirements are not met, market position may

be lost, possibly decreasing equity prices.

Fuel/Energy

Taxation11 Low-High

• Higher

operational cost

• Higher capital

cost

6 years

or less

Direct

Indirect

Unlikely

-Virtually

certain

• Sale/

lease

• Mainte-

nance

If energy efficiency measures are not sufficient, our

operational costs may increase due to the renewable

energy standards, energy tax and regulations.

Carbon Tax 6Somewhat

Low-Med

• Higher

operational cost

• Higher capital

cost

6 years

or less

Direct

Indirect

Unlikely

-Virtually

certain

• Sale/

lease

• Mainte-

nance

Considering uncertainties about nuclear power

generation, we may need to increase fossil fuels to

supplement the shortage while increasing costs.

General

Environment

al regulations

including

plans

6 Low-Med

• Higher

operational cost

• Higher capital

cost

• Operational

suspension

Short-

to long-

term

Direct

About as

likely as not-

Virtually

certain

• Overall

As a real estate business operator, we will be

affected by the UK government’s MEES regulation

effective on April 1, 2018. Due to this regulation,

leasing properties/units with EPC rating below E will

not be allowed.

Cap and

Trade5

Low-

Somewhat

High

• Higher

operational cost

1-6

yearsDirect

About as

likely as not-

Virtually

certain

• Planning

• Developm

ent

• Sale/

lease

• Mainte-

nance

UK participation in the EU scheme is uncertain. If a

new scheme is established, other sites in the

portfolio will need to participate, possibly increasing

carbon prices considerably.

Source: Companies'

Replies to CDP


Please answer

details of risks

from

regulations

among the

current or future

potential climate

change risks

that may affect

your company’s

business

activities,

revenue and

expenditure.

CDP Question

3

149

Many companies recognize regulations of product efficiency, etc., as risks (1/2)

[iii. Buildings/ Forest Products Sector ]


to CDP

Risk ItemNo. of

RepliesInfluence

Potential

ImpactPeriod

Direct-


Obligation to

Report

Emissions

5

Low-

Somewhat

High

• Higher

operational

cost

3 years

or lessDirect

About as

likely as not-

Virtually

certain

• Maintenance

Various emission regulations are implemented in

many parts of the world. If reporting obligations

continue to increase, it may increase our

operational costs.

International

Agreement3

Somewhat

Low-

Somewhat

High

• Higher

operational

cost

3 years

or moreDirect

About as

likely as not-

Very likely

• Planning

• Maintenance

If the UK is excluded from the EU scheme, energy

imports from the EU will be restricted, incurring a

risk of building closures and the suspension of

customer businesses.

Uncertainties

Surrounding

New

Regulations

3 High• Operational

suspension

Short-

to long-

term

Direct

About as

likely as not-

Likely

• Planning

• Sale/lease

It will lead to an additional risk as to how

governments will change their policies for the

generation of renewable energies and the nation’s

carbon emission reduction in accordance with the

Paris Agreement.

Restriction on

Air Pollution1 Low

• Higher

capital cost

1 year

or lessDirect

More likely

than not

• Planning

• Sale/lease

Laws regulating air pollution may affect plants and

other facilities in the Company’s real estate.

Product

Labelling

Regulations

and Standards

1Somewhat

Low

• Lower

demand

• Assets

becoming

obsolete

3-6

yearsDirect

About as

likely as not

• Planning

• Sale/lease

Energy certificates such as LEED and ENERGY

STAR stipulate the minimum permissible energy

rating.Source: Companies'

Replies to CDP


Please answer

details of risks

from

regulations

among the

current or future

potential climate

change risks

that may affect

your company’s

business

activities,

revenue and

expenditure.

CDP Question

3

150

Many companies recognize regulations of product efficiency, etc., as risks (2/2)

Source: Companies'

Replies to CDP


Please answer

details of physical

risks among the

current or future

potential climate

change risks that

may affect your

company’s

business

activities, revenue

and expenditure.

Risk ItemNo. of


Direct-


Changes in

Heavy Rains

and

Drought

9 Low-High


capacity

• Higher

operational cost

• Operational

suspension

• Higher capital

cost

Short- to

long-

term

Direct

More likely

than not-

Virtually

certain

• Development

• Planning

• Sale/lease

• Maintenance

Extreme climate events will cause

damage to properties, confuse staff’s

work and customers’ purchases, and

cause an increase in operational costs

and disruption of businesses.

Higher sea

levels8 Low-High

• Lower demand

• Higher

operational cost

• Operational

suspension

• Higher capital

cost

Short- to

long-

term

Direct

Indirect

Likely-

Very likely• Development

• Maintenance

We own properties along the coasts of

the U.S. and UK. Sea-level rise may

incur damage or loss of properties.

Tropical

Cyclones

(Hurricanes

and

Typhoons)

6

Low-

Somewhat

High

• Higher

operational cost

• Expansion of

social defects

• Operational

suspension

• Higher capital

cost

Short- to

long-

term

Direct

Indirect

About as

likely as

not-Very

likely

• Sale/lease

• Maintenance

Typhoons occur very frequently along

the coastal lines in the eastern part of

China. We have spent substantial

financial resources to repair and

maintain buildings there.

Extreme

variability in

temperature

5 Low-High

• Higher capital

cost

• Lower demand

• Higher

operational cost

1 year

or more

Direct

Indirect

Likely-

More likely

than not

• Planning

• Maintenance

If external temperatures change

extremely, it may increase costs to

maintain the internal temperatures in

buildings.



to CDP

3

151

In companies’ replies to CDP, many of them recognize heavy rains and droughts as risks.

(1/2)

Source: Companies'

Replies to CDP


Please answer

details of physical

risks among the

current or future

potential climate

change risks that

may affect your

company’s

business activities,

revenue and

expenditure.

Risk ItemNo. of


Direct-


Increase in

Average

Precipitation

4 Low-High

• Higher

operational cost

• Higher capital

cost

• Lower asset

values

Short-

to long-

term

Direct

Indirect

Unlikely-

About as

likely as not

• Planning

• Sale/ lease

• Maintenance

Financial risks from floods are two;

increase in claims from tenants due

to the inability to do business; and

increase in costs of corrective

measures to repair damage from

floods

Rise of

Average

Temperatures

4

Low-

Somewha

t High

• Higher

operational cost

• Higher capital

cost

Short-

to long-

term

Direct

Indirect

Likely-More

likely than not

• Sale/ lease

• Maintenance

Variability in the average

temperature may invite an increase

in cooling/warming costs and a rise

in costs due to extreme weather

events.

Snow and Ice 4

Somewha

t Low-

High


capacity

• Higher

operational cost

• Lower demand

• Higher capital

cost

Short-

to long-

termDirect

More likely

than not-

Virtually

certain

• Sale/lease

• Maintenance

Accumulation of snow and ice may

invite an increase in operational

costs and insurance-related costs,

increase in maintenance and repair

costs of damaged enclosure parts,

and disruption of services.

Changes in

Natural

Resources

3 Med-High

• Higher

operational cost

• Expansion of

social defects

• Higher capital

cost

6 years

or moreIndirect

More likely

than not Very

likely

• Planning

• Maintenance

Changes in natural resources may

affect the ability of suppliers to

procure materials and products for

operations, such as food

Changes in

Precipitation

Patterns

2 NA

• Higher capital

cost


capacity

NA Direct NA• Sale/ lease

• Maintenance

Variability in temperatures,

precipitation patterns and extreme

weather patterns may increase

damage at some of our properties.

Uncertainty

about physical

risks

1 NA• Impact on the

whole businessNA Direct NA • Planning

If a building is not designed to

respond to changes, it will entail

risks



to CDP

3

152

In companies’ replies to CDP, many of them recognize heavy rains and droughts as risks.

(2/2)

Source: Companies'

Replies to CDP


Please answer

details of other

risks among the

current or future

potential climate

change risks

that may affect

your company’s

business

activities,

revenue and

expenditure.

Risk ItemNo. of

RepliesInfluence

Potential

ImpactPeriod

Direct-


Reputation 13 Low-High

• Operational

suspension

• Lower

availability of

capital

6

years

or less

Direct

Indirect

About as

likely as

not-Very

likely

• Overall

In the scope where concerns about climate

change-related issues are spread, if response

to the market demand is insufficient, there will

be a reputation risk for business and may

potentially incur disadvantages for competition.

Change in

customer

behaviors

8

Med-

Somewhat

High

• Higher capital

cost

• Lower demand

• Lower asset

values

Short-

to

long-

term

Direct

Indirect

About as

likely as

not-

Virtually

certain

• Planning

• Sale/ Lease

In the French real estate market, certified

buildings are becoming the market standards.

Real estate companies need to ensure a high

level of energy efficiency for buildings in order

to remain competitive in the market: Companies

not doing so may see their market share decline.

Changes in

Socio-

economic

Conditions

2

Somewhat

Low-

Somewhat

High

• Higher

operational

cost

• Lower demand

1 year

or

more

DirectVirtually

certain• Development

• Sale/ Lease

Energy costs linked to oil prices may pose a

substantial risk for petroleum materials such as

asphalt and transportation cost.

Uncertainty

of Market

Signals

2

Somewhat

Low-

Somewhat

High

• Lower demand

• Higher

operational

cost

1 year

or

more

Direct

Likely-More

likely than

not

• Land

acquisition

• Maintenance

Extreme weather events and other climate

change risks may have negative effects on our

company in the U.S. and major markets. In the

short run, rise in the cost of fuel, energies, and

merchandise are the most direct risks.

Change of

people and

cultural

environment

1 High

• Higher

operational

cost

6

years

or

more

Direct Likely • Maintenance

When climate change starts, many people

move to city centers seeking properties for rent.

Therefore, the existing commercial spaces are

required to be converted to more profitable

residential spaces for developers and house

owners. This will lead to an increase in rents for

commercial properties.



to CDP

3

153

In companies’ replies to CDP, they recognize reputation as other risks.

Risk ItemNo. of


Direct-

nessFeasibility

Impact on


Product

Efficiency

Regulations and

Standards

2 Med-High• Operational costs

• Lower demand1-6 years

Direct

Indirect

Likely-

Very likely

• Production

• Sale

There are laws stipulating standards for thermal insulation

performance and facility efficiency for buildings of certain

sizes; if such standards are raised, buildings will need to

be improved to respond.

Cap-and-Trade 1 Med

• Higher capital cost


cost

Short- to

long-term

Direct

Indirect

Virtually

certain• Production

Emission trading systems are beginning to be introduced

in countries like New Zealand and China where we are

doing business. If target businesses are expanded in the

future, we may become a mandatory participant in some

cases. Moreover, depending on international trends,

changes in domestic systems may affect business

activities and costs.

Carbon Tax 1 Med• Higher operational

cost3-6 years Direct

More likely

than not• Sale

As it is pointed out that the tax rate of “Global warming

countermeasure tax” introduced in Japan is low, the rate

may be raised as a “carbon tax” going forward.

Fuel/Energy

Regulations1

Some-

what high• Higher operational

cost3-6 years Direct Very likely

• Material

procure-

ment

If regulations, etc., are introduced for wood procurement

to achieve the target of the Paris Agreement, there will be

a risk of not being able to secure enough wood

procurement or increasing costs.

Emission

Reporting

Regulations

1 Low • Lower demand 3-6 years DirectMore likely

than not• Overall

If penalties, etc., are reinforced for failed reductions in the

system, which requires businesses with large GHG

emissions to calculate/report emissions, there will be a

risk of lower evaluations by stakeholders.



(Reference)[iii. Buildings/ Forest Products Sector (Residence)]

Study on the recognition of transition/physical risks by companies based on companies'

replies to CDP

Three housing/building business companies recognize regulations of product efficiency

and fuel regulations as transition risks.

3

154

Risk ItemNo. of


Direct-


Tropical

Cyclones

(Hurricanes/Typ

hoons)

2

Low -

Somewhat

low


cost


capacity

3 years-Direct

Indirect

Most Likely

than not –

Unlikely

• R&D

• Production

Due to extraordinary weather caused by global warming,

it may become necessary to make additional investment

in research and development as well as production

processes to strengthen disaster-prevention functions

such as typhoon-resistant housing properties.

If the maximum wind velocity increases resulting in more

storms, buildings already built or under construction may

be damaged.

Extreme

variability in

temperature

1 Low• Lower production

capacity

1-3

yearsIndirect

More likely

than not• Production

If temperatures rise to substantially raising the highest

temperature during the summer, there is a possibility that

a risk of heat attack will be higher for construction

workers, prolonging construction periods, among other

issues.

Variability in

precipitation1 Low～Med


capacity3-6 years Direct Likely • Production

Due to the variability in precipitation, there is a risk of

lower water levels at dams, disrupting the transmission of

electricity from hydroelectric generation stations, and

thereby suspending the operation of factories.

Forest Fires/

Wood Loss1

Some-

what high


capacity-1 year Direct Very Likely • Overall

In the case of forest loss due to fire in company-owned

forests and in/outside of plantations, or fire in a managed

area, there will be a risk of damage claims.

Natural

Disasters1 High


cost-1 year Direct

Virtually

certain• Product use

There is a risk of incurring damage to houses due to

natural disasters such as large typhoons and tornados

and heavy snow caused by climate change.

Changes in

Natural Capital1 High


capacity6 years- Direct Likely

• Material

procure-

ment

There is a risk that we will have to change suppliers of

raw materials in the case of depletion of wood resources,

changes in habitats and harvesting, and accompanying

regulations due to climate change.


Recognition by Companies on Physical Risks (see Companies’ Replies to CDP)



to CDP

Three housing/building companies recognize natural disasters and natural capital changes

as physical risks.

3

155

Risk ItemNo. of


Direct-

nessFeasibility

Impact on


Change in

customer

behaviors

2

Some-

what

High-High


cost

• Lower demand

1 year-Direct

Indirect

Likely-

Very likely

• Material

procure-

ment

• Sale

• Product use

There is a possibility of a rise in procurement costs and

securing of procurement sources if concerns about

increases in CO2 emissions by environmentally-damaging

development of forest resources are heightened, and

consumers become inclined to use forest-certified wood.

If demand for life cycle carbon negative houses rises so

much that we cannot deal with them, there is a risk of

losing share to other companies. Moreover, there is a risk

of increasing costs due to requests for making houses

resilient and after-sale services in preparation for climate

change.

Reputation 1 High • Lower demand 1-3 years Indirect Likely • Sale

Initiatives against illegal logging has been strengthened

not only in developed countries but also in emerging

countries. If our counterparties for wood fail to comply with

these regulations, it will affect our company as the

handling trading company with a risk of a decrease, etc., in

sales and others by the decline of the brand.


Recognition by Companies on Other Risks (see Companies’ Replies to CDP)



to CDP

Three housing and building companies recognize assessments and reputation of

customer behaviors as risks

3

156

Cyclones, floods and sea-level rise are listed as physical risks surrounding the real estate industry.

Source: "Advancing TCFD guidance on physical climate risks and opportunities”, Global research institute “Measuring physical climate risk in equity portfolios”

Influences caused by physical risks differ

depending on business characteristics such as

water and energy consumption

Examples of specific influences given by physical

risks:

• Rise in energy cost and burden on workers

due to higher temperatures

• Water shortage and higher operational costs

due to water stress

• Asset damage and transfer costs due to

cyclones and others

*Table on the left is an excerpt

ChronicAcute

[iii. Buildings/Forest Products Sector]

Physical Risk Assessment on Each Industry by EBRD and Others

In the real estate industry, storms, floods and sea-level rise are expected to be risks that

will have substantial impacts.

4

157

(Reference) Assessment Guidance for Physical Risks and Opportunities by Initiatives Receiving TCFD recommendations


• EBRD (European Bank for Reconstruction and Development): Established after the end of Cold War to develop market economies in central

and eastern European countries. It also advocates promotion of the “environment-friendly sustainable development” and aggressively makes

investments related to climate change.

• GCECA (Global Centre of Excellence on Climate Adaptation): An organization established by the United Nations and governments of

countries including the Netherlands. Having partnerships with NGOs, financial institutions and others, it aims to promote adaptation to climate

through the sharing of knowledge and development of assessment methods, among others.



account TCFD recommendations. It was prepared after discussions in the working group combining financial institutions and companies,

among others.


(Reference) Analysis of physical risks and transition risks in the real estate industry by an investor group in Australia

and New Zealand

Overview of the institution: IIGCC (International Investors Group on Climate Change)

Collaboration of investors in Australia and New Zealand. It focuses on the impact of climate change on financial values of

investment.


To provide information to assist investors in assessing climate risks and opportunities in the property and building sectors

To analyze risks and corresponding strategies, and identify opportunities for each physical risk and transition risk

[Transition Risks]

In Australia, assets not complying with a low carbon society entail more than one transition risks.

Source: IIGCC ”Assessing Climate Change Risks and Opportunities for Investors” (2013)


IIGCC Risk Analysis Report on the Real Estate Industry (1/2)

Buildings with low energy efficiency will face transition risks including higher costs and

lower asset values

5

158

Risk Background and Impact of Risk

Higher

Electricity/

Water Charges

• The average price of electricity in Australia is expected to rise due to investment in electric power infrastructure and rise in carbon

prices.

• Higher electricity/water charges will present opportunities for improving efficiency to real estate companies.

Loss of

Premium Prices

• Energy-efficient offices will be rated highly, receive premium prices and become advantageous for the contract as premium tenants

being resilient to extreme weather.

• Due to such tendencies, energy saving by tenants will improve, bringing benefits to real estate companies.

Higher Vacancy

Ratios/ Lower

Asset values

• Given that energy-efficiency of leasing and purchasing properties is required to be disclosed by law, properties with low assessment

have difficulty finding tenants or purchasers .

• Energy-efficient buildings can acquire higher asset values due to low vacancy rates, rise of rents and decrease in maintenance costs

Higher Material

Costs

• Manufacturing costs will increase due to the rise in carbon prices and increase in construction materials prices (glass, cement, and

others)

Stricter

Compliance

Levels

• With low carbon regulations for architecture becoming stricter globally, stricter levels will also be required when repairing buildings

[Physical Risks] In Australia, physical risks bring linear impacts on the construction stage and real estate

Analyzing impacts by sector based on the future forecasts of weather conditions

Source: IIGCC ”Assessing Climate Change Risks and Opportunities for Investors” (2013)

Physical Risks Impacts on Construction Impacts on Real Estate

Mega-Cyclones/Floods • Delays in construction

• Increases in construction costs and

insurance premiums due to the

countermeasures against floods

• Damage to assets

• Suspension of business

• Increase in insurance premiumsOccurrence of Frequent Hail/Floods

Heavy Rains

Decrease in Water Resources • Higher costs due to the rise in water prices

• Higher electricity prices due to the

decrease in hydro-power generation

caused by drought

N/A

Rise of Average Temperatures • Higher prices due to the sharp increase in

demand for electricity during the summer

• Power failures and risks of construction

cancellations

• Lower productivity from fatigue and

increased risks of accidents due to heat

(Same as written on the left )

Increase in Extremely Hot Days

(Northern Australia)

Forest Fires • Restrictions in vulnerable regions • Damage to assets


• Disruption of electric power supply

• Increases in insurance premiums

Sea-level Rise • Restrictions on construction permits

• Increased costs and delayed construction

in lands of low altitude relative to sea level

• Flood damage

• Investment costs for countermeasures

against floods


• Decrease in land values


IIGCC Risk Analysis Report on the Real Estate Industry (2/2)

The real estate industry faces various physical risks with higher costs and lower asset values

5

159

(Reference) Analysis of Physical Risks in the UK Real Estate Industry by A Climate Change Risk Analysis Institution

Overview of the institution: ACCLIMATISE

An advisory institution specializing in climate change risk management. It provides climate change risk analysis and

adaptive strategies to private and public institutions


To report on linear and indirect impacts of climate change risks on the industry, intending to develop discussions

among companies, investors and government.

To analyze climate change risks and adapting strategies in the U.K. commercial real estate industry

The UK real estate industry will be affected in terms of profits, capital values, evaluations and regulations due to transition risks and

physical risks

Risks Impact from Risks Overview

Higher

Temperatures

• Higher maintenance costs

• Lower property values

• Degradation of materials

• Maintenance costs will rise because it will be necessary to have exterior coating to prevent damage to

buildings by ultraviolet rays

• Lower value for properties with low energy efficiency

• Progress in degradation of materials such as asphalt

Variability in

Precipitation

Patterns

• Higher costs of supplying water

• Lower asset values and higher

insurance premiums

• Higher maintenance costs

• Land subsidence risk

• Higher costs of supplying water due to drought

• Lower asset values and higher insurance premiums in areas with the risk of floods

• Maintenance costs will rise because it will be necessary to have exterior walls resistant to heavy rains

• There will be a higher risk of land subsidence as soils will change due to the variability in precipitation

patterns

Storms • Higher maintenance costs • Maintenance costs will rise with a higher risk of structural damage to buildings

Extraordinary

Weather in General

• Delays in constructions

• Substantial rise in construction

costs

• Delays in construction will occur due to extraordinary weather

• Construction costs will rise due to the decrease in available working hours

Policy Trends • Increase in demand for energy-

efficient assets

• Stricter building standards

• Demand for energy-efficient assets will increase by the implementation of “Green Procurement“ by the

government

• Renewable energy ratio of energies consumed and building standards for emissions such as energy-

efficiency of buildings will rise, with a possibility of non-compliance

Source: ACCLIMATISE ”UK commercial property Understanding the investment implications of adapting to climate change” (2009)


Survey Report by ACCLIMATISE

Climate change risks bring about lower asset values, higher costs, and lower demand,

among others

6

160

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